In the Matter of the Application of BATS Exchange, Inc. for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission, 49498-49507 [E8-19388]
Download as PDF
<![CDATA[
49498
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
II. Statutory Standards
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–58375; File No. 10–182]
In the Matter of the Application of
BATS Exchange, Inc. for Registration
as a National Securities Exchange;
Findings, Opinion, and Order of the
Commission
August 18, 2008.
I. Introduction
On November 8, 2007, BATS
Exchange, Inc. (‘‘BATS Exchange’’ or
‘‘Exchange’’) submitted to the Securities
and Exchange Commission
(‘‘Commission’’) a Form 1 application
(‘‘Form 1’’) under the Securities
Exchange Act of 1934 (‘‘Act’’), seeking
registration as a national securities
exchange pursuant to Section 6 of the
Act.1 On February 13, 2008, BATS
Exchange submitted Amendment No. 1
to its Form 1. Notice of the application,
as amended, was published for
comment in the Federal Register on
February 20, 2008.2 The Commission
received one comment letter regarding
the BATS Exchange Form 1.3 On June
18, 2008, BATS Exchange filed
Amendment No. 2 to its Form 1.4
1 15
U.S.C. 78f.
Securities Exchange Act Release No. 57322
(February 13, 2008), 73 FR 9370 (‘‘Notice’’).
3 The commenter expressed support for the BATS
Exchange Form 1. See letter from Brian McPartlin
dated February 14, 2008.
4 In Amendment No. 2, BATS Exchange modified
its application by: (1) Updating its response to the
Form 1 Exhibits to reflect, among other things,
certain personnel changes, the existence of a new
affiliate, BATS Trading Limited, audited financials
for BATS Trading, Inc. (‘‘BATS Trading’’), and how
BATS Exchange intends to fulfill its regulatory
obligations; (2) adding a provision to the BATS
Exchange Amended and Restated By-Laws that
allows the stockholder of BATS Exchange to
appoint the initial Member Representative Directors
to the BATS Exchange Board, and amending the
definition of ‘‘Executive Representative’’ of a
member of BATS Exchange; (3) updating certain
provisions of the Investors Rights Agreement; and
(4) amending the BATS Holdings Amended and
Restated Certificate of Incorporation to reduce the
number of authorized shares of stock of BATS
Holdings, Inc. (‘‘BATS Holdings’’). BATS Exchange
also made certain modifications to its proposed
rules to: (1) Change the start of its pre-opening
session from 9:00 a.m. to 8:00 a.m.; (2) remove the
ability of a person to submit one membership
application with the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), when applying for
membership in both FINRA and BATS Exchange;
(3) clarify that the requirement for eligibility for
BATS Exchange membership of membership in
another SRO applies for continued membership; (4)
clarify that the 90-day waive-in period will begin
on the date that BATS Exchange’s application for
registration as a national securities exchange is
approved by the Commission; (5) amend the BATS
Only Order type to provide that a non-displayed
order would get a new timestamp when it becomes
displayed; (6) add continuing education
requirements for Authorized Traders that are
substantially similar to those of FINRA; (7) specify
mstockstill on PROD1PC66 with NOTICES
2 See
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
III. Discussion
Under Sections 6(b) and 19(a) of the
Act,5 the Commission shall by order
grant a registration as a national
securities exchange if it finds that the
exchange is so organized and has the
capacity to carry out the purposes of the
Act and can comply, and can enforce
compliance by its members and persons
associated with its members, with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the exchange.
As discussed in greater detail below,
the Commission finds that BATS
Exchange’s application for exchange
registration meets the requirements of
the Act and the rules and regulations
thereunder. Further, the Commission
finds that the proposed rules of BATS
Exchange are consistent with Section 6
of the Act in that, among other things,
they are designed to: (1) Assure fair
representation of an exchange’s
members in the selection of its directors
and administration of its affairs and
provide that, among other things, one or
more directors shall be representative of
investors and not be associated with the
exchange, or with a broker or dealer; (2)
prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade, foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, remove impediments to
and perfect the mechanisms of a free
and open market and a national market
system; and (3) protect investors and the
public interest. The Commission also
believes that the rules of BATS
Exchange are consistent with Section
11A of the Act.6 Finally, the
Commission finds that the proposed
rules of BATS Exchange do not impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.7
A. Corporate Structure
BATS Exchange has applied to the
Commission to register as a national
securities exchange. BATS Holdings, a
Delaware corporation, will wholly own
BATS Exchange and BATS Trading.
Currently, BATS Trading, a registered
broker-dealer, operates the BATS ECN.
Before operation of BATS Exchange as
a national securities exchange, BATS
Trading will transfer most of its assets
to BATS Exchange. BATS Trading will
continue as a broker-dealer with the sole
function of providing outbound order
routing services to BATS Exchange.8
certain BATS Exchange rules and recommended
fine amounts for minor rule violations; (8) delete a
provision requiring non-clearing members to
implement certain procedures of FINRA’s Code of
Practice; (9) amend its rule relating to failures to
deliver/receive to conform to Regulation SHO; and
(10) adding a rule to codify the ability of BATS
Exchange to enter into an agreement with another
self-regulatory organization (‘‘SRO’’) to provide
regulatory services to BATS Exchange. The changes
proposed in Amendment No. 2 either are not
material or are otherwise responsive to the concerns
of the Commission.
5 15 U.S.C. 78f(b) and 78s(a).
6 15 U.S.C. 78k–1.
7 15 U.S.C. 78f(b)(8).
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
1. Self-Regulatory Function of BATS
Exchange; Relationship Between BATS
Holdings, Inc. and BATS Exchange;
Jurisdiction Over BATS Holdings, Inc.
Although BATS Holdings will not
itself carry out regulatory functions, its
activities with respect to the operation
of BATS Exchange must be consistent
with, and not interfere with, the
Exchange’s self-regulatory obligations.
The proposed BATS Holdings corporate
documents include certain provisions
that are designed to maintain the
independence of the Exchange’s selfregulatory function from BATS
Holdings, enable the Exchange to
operate in a manner that complies with
the federal securities laws, including the
objectives of Sections 6(b) and 19(g) of
the Act, and facilitate the ability of the
Exchange and the Commission to fulfill
their regulatory and oversight
obligations under the Act.9
For example, BATS Holdings submits
to the Commission’s jurisdiction with
respect to activities relating to BATS
Exchange,10 and agrees to provide the
Commission and BATS Exchange with
access to its books and records that are
related to the operation or
administration of BATS Exchange.11 In
addition, to the extent they are related
to the operation or administration of
BATS Exchange, the books, records,
premises, officers, directors, agents, and
employees of BATS Holdings shall be
deemed the books, records, premises,
officers, directors, agents, and
employees of BATS Exchange for
purposes of, and subject to oversight
pursuant to, the Act.12 BATS Holdings
8 See BATS Exchange Rule 2.11. See also infra
note 151 and accompanying text.
9 See BATS Holdings Amended and Restated ByLaws Article XII and Article XIV, Sections 14.01,
14.02, 14.03, 14.04, 14.05, and 14.06.
10 See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.05.
11 See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.03.
12 Id.
E:\FR\FM\21AUN1.SGM
21AUN1
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
mstockstill on PROD1PC66 with NOTICES
also agrees to keep confidential nonpublic information relating to the selfregulatory function 13 of BATS
Exchange and not to use such
information for any non-regulatory
purpose.14 In addition, the board of
directors of BATS Holdings, as well as
its officers, employees, and agents, are
required to give due regard to the
preservation of the independence of the
Exchange’s self-regulatory function.15
Further, BATS Holdings By-Laws
require that any changes to the BATS
Holdings Certificate of Incorporation
and By-Laws be submitted to the Board
of Directors of the Exchange (‘‘Exchange
Board’’), and, if such amendment is
required to be filed with the
Commission pursuant to Section 19(b)
of the Act, such change shall not be
effective until filed with, or filed with
and approved by, the Commission.16
The Commission finds that these
provisions are consistent with the Act,
and that they will assist the Exchange in
fulfilling its self-regulatory obligations
and in administering and complying
with the requirements of the Act.
The Commission also believes that
under Section 20(a) of the Act 17 any
person with a controlling interest in
BATS Exchange would be jointly and
severally liable with and to the same
extent that BATS Exchange is liable
under any provision of the Act, unless
the controlling person acted in good
faith and did not directly or indirectly
induce the act or acts constituting the
violation or cause of action. In addition,
Section 20(e) of the Act 18 creates aiding
and abetting liability for any person
who knowingly provides substantial
assistance to another person in violation
of any provision of the Act or rule
thereunder. Further, Section 21C of the
Act 19 authorizes the Commission to
enter a cease-and-desist order against
any person who has been ‘‘a cause of’’
a violation of any provision of the Act
through an act or omission that the
person knew or should have known
would contribute to the violation. These
13 This requirement to keep confidential nonpublic information relating to the self-regulatory
function shall not limit the Commission’s ability to
access and examine such information or limit the
ability of directors, officers, or employees of BATS
Holdings to disclose such information to the
Commission. See BATS Holdings Amended and
Restated By-Laws Article XIV, Section 14.02.
14 See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.02.
15 See BATS Holdings Amended and Restated ByLaws Article XIV, Section 14.01.
16 See BATS Holdings Amended and Restated
Certificate of Incorporation TWELFTH and BATS
Holdings Amended and Restated By-Laws Article
XII.
17 15 U.S.C. 78t(a).
18 15 U.S.C. 78t(e).
19 15 U.S.C. 78u–3.
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
provisions are applicable to BATS
Holdings’ dealings with BATS
Exchange.
2. Ownership and Voting Limitations;
Changes in Control of BATS Exchange
The BATS Holdings proposed
Amended and Restated Certificate of
Incorporation includes restrictions on
the ability to own and vote shares of
capital stock of BATS Holdings.20 These
limitations are designed to prevent any
shareholder from exercising undue
control over the operation of BATS
Exchange and to assure that the
Exchange and the Commission are able
to carry out their regulatory obligations
under the Act.
Generally, no person, either alone or
together with its related persons,21 may
beneficially own more than forty
percent of any class of capital stock of
BATS Holdings.22 The BATS Holdings
proposed Amended and Restated
Certificate of Incorporation prohibits
BATS Exchange members, either alone
or together with their related persons,
from beneficially owning more than
twenty percent of shares of any class of
capital stock of BATS Holdings.23 If any
stockholder violates these ownership
limits, BATS Holdings will redeem the
shares in excess of the applicable
ownership limit for their fair market
value.24 In addition, no person, alone or
together with its related persons, may
vote or cause the voting of more than
twenty percent of the voting power of
the then issued and outstanding capital
stock of BATS Holdings.25 If any
stockholder purports to vote, or cause
the voting of, shares that would violate
this voting limit, BATS Holdings will
not honor such vote in excess of the
voting limit.26
The BATS Holdings Board may waive
the forty percent ownership limitation
applicable to non-BATS Exchange
member stockholders and the twenty
20 These provisions are generally consistent with
ownership and voting limits approved by the
Commission for other SROs. See e.g., Securities
Exchange Act Release Nos. 53963 (June 8, 2006), 71
FR 34660 (June 15, 2006) (SR–NSX–2006–03)
(‘‘NSX Demutualization Order’’); 51149 (February 8,
2005), 70 FR 7531 (February 14, 2005) (SR–CHX–
2004–26) (‘‘CHX Demutualization Order’’); and
49098 (January 16, 2004), 69 FR 3974 (January 27,
2004) (SR–Phlx–2003–73) (‘‘Phlx Demutualization
Order’’).
21 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (a)(ii).
22 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(A).
23 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(B).
24 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (e).
25 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (b)(i)(C).
26 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (d).
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
49499
percent voting limitation, pursuant to a
resolution duly adopted by the Board of
Directors, if it makes certain findings.
Any such waiver would not be effective
until approved by the Commission
pursuant to Section 19 of the Act.27
However, as long as BATS Holdings
directly or indirectly controls BATS
Exchange, the BATS Holdings Board
cannot waive the voting and ownership
limits above twenty percent for BATS
Exchange members and their related
persons.28
Members that trade on an exchange
traditionally have ownership interests
in such exchange. As the Commission
has noted in the past, however, a
member’s interest in an exchange could
become so large as to cast doubt on
whether the exchange can fairly and
objectively exercise its self-regulatory
responsibilities with respect to that
member.29 A member that is a
controlling shareholder of an exchange
might be tempted to exercise that
controlling influence by directing the
exchange to refrain from, or the
exchange may hesitate to, diligently
monitor and surveil the member’s
conduct or diligently enforce its rules
and the federal securities laws with
respect to conduct by the member that
violates such provisions.
In addition, as proposed, BATS
Exchange will be a wholly-owned
subsidiary of BATS Holdings. The
BATS Exchange Amended and Restated
By-Laws identifies this ownership
structure.30 Any changes to the BATS
Exchange Amended and Restated ByLaws, including any change in the
provision that identifies BATS Holdings
as the sole owner, must be filed with
and approved by the Commission
pursuant to Section 19 of the Act.31
Further, pursuant to the BATS Exchange
Amended and Restated By-Laws, BATS
Holdings may not transfer or assign, in
whole or in part, its ownership interest
in BATS Exchange.32
27 See BATS Holdings Amended and Restated
Certificate of Incorporation FIFTH (b)(ii)(B).
28 These provisions are generally consistent with
waiver of ownership and voting limits approved by
the Commission for other SROs. See e.g., NSX
Demutualization Order, supra note 20; CHX
Demutualization Order, supra note 20; and
Securities Exchange Act Release No. 49718 (May
17, 2004), 69 FR 29611 (May 24, 2004) (SR–PCX–
2004–08).
29 See, e.g., Securities Exchange Act Release Nos.
53128 (January 13, 2006), 71 FR 3550 (January 23,
2006) (File No. 10–131) (‘‘Nasdaq Exchange
Registration Order’’) and 53382 (February 27, 2006),
71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77)
(‘‘NYSE/Archipelago Merger Approval Order’’).
30 See BATS Exchange Amended and Restated
By-Laws Article I(cc).
31 See 15 U.S.C. 78s.
32 See BATS Exchange Amended and Restated
By-Laws Article IV, Section 7.
E:\FR\FM\21AUN1.SGM
21AUN1
49500
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
The Commission believes that these
provisions are consistent with the Act.
These requirements should minimize
the potential that a person could
improperly interfere with or restrict the
ability of the Commission or the
Exchange to effectively carry out their
regulatory oversight responsibilities
under the Act.
3. BATS Exchange
BATS Exchange has applied to the
Commission to register as a national
securities exchange. As part of its
exchange application, the Exchange has
filed the BATS Exchange Certificate of
Incorporation and the proposed
Amended and Restated By-Laws of
BATS Exchange. In these documents,
among other things, BATS Exchange
establishes the composition of the
Exchange Board and the BATS
Exchange committees.
mstockstill on PROD1PC66 with NOTICES
a. The BATS Exchange Board of
Directors
The Exchange Board will be the
governing body of BATS Exchange and
possess all of the powers necessary for
the management of the business and
affairs of the Exchange and the
execution of its responsibilities as an
SRO. Under the BATS Exchange
Amended and Restated By-Laws:
• The Exchange Board will be
composed of ten directors; 33
• One director will be the Chief
Executive Officer of BATS Exchange; 34
• The number of Non-Industry
Directors,35 including at least one
Independent Director,36 will equal or
exceed the sum of the number of
Industry Directors 37 and Member
Representative Directors; 38 and
33 See BATS Exchange Amended and Restated
By-Laws Article III, Section 2(a).
34 See BATS Exchange Amended and Restated
By-Laws Article III, Section 2(b).
35 ‘‘Non-Industry Director’’ means a Director who
is an Independent Director or any other individual
who would not be an Industry Director. See BATS
Exchange Amended and Restated By-Laws Article
I(v).
36 ‘‘Independent Director’’ means a ‘‘Director who
has no material relationship with the [Exchange], or
any Exchange Member or any affiliate of any such
Exchange Member; provided, however, that an
individual who otherwise qualifies as an
Independent Director shall not be disqualified from
serving in such capacity solely because such
Director is a Director of the [Exchange] or its
stockholder.’’ See BATS Exchange Amended and
Restated By-Laws Article I(m).
37 Generally, an ‘‘Industry Director’’ is, among
other things, a Director that is or has been within
the past three years an officer, director, employee,
or owner of a broker-dealer. In addition, persons
who have a consulting or employment relationship
with the Exchange and its affiliates, are considered
‘‘Industry.’’ See BATS Exchange Amended and
Restated By-Laws Article I(o).
38 See BATS Exchange Amended and Restated
By-Laws Article III, Section 2(b)(i).
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
• At least twenty percent of the
directors on the Exchange Board will be
Member Representative Directors.39
BATS Holdings will appoint the
initial Exchange Board, including the
Member Representative Directors,
which shall serve until the first annual
meeting of stockholders.40 The first
annual meeting of the stockholders will
be held prior to BATS Exchange
commencing operations as a national
securities exchange.41 At the first
annual meeting of stockholders, a new
Exchange Board will be elected
pursuant to the BATS Exchange
Amended and Restated By-Laws.
Therefore, prior to commencing
operations as a national securities
exchange, BATS Exchange Members
will have the opportunity to participate
in the selection of Member
Representative Directors, and the
Exchange Board will be in compliance
with the compositional requirements
contained in the BATS Exchange
Amended and Restated By-Laws.42
BATS Holdings will appoint the
initial Nominating Committee 43 and
Member Nominating Committee,44
consistent with each committee’s
compositional requirements,45 to
nominate candidates for election to the
Exchange Board. Each of the
Nominating Committee and Member
Nominating Committee, after
completion of its respective duties for
nominating directors for election to the
Board for that year, shall nominate
39 See BATS Exchange Amended and Restated
By-Laws Article III, Section 2(b)(ii). ‘‘Member
Representative Director’’ means a ‘‘Director who has
been elected by stockholders after having been
nominated by the Member Nominating Committee
or by an Exchange Member pursuant to these ByLaws and confirmed as the nominee of Exchange
Members after majority vote of Exchange Members,
if applicable. A Member Representative Director
must be an officer, director, employee, or agent of
an Exchange member that is not a Stockholder
Exchange Member.’’ See BATS Exchange Amended
and Restated By-Laws Article I(s). See also BATS
Exchange Amended and Restated By-Laws Article
III, Section 4(b).
40 See BATS Exchange Amended and Restated
By-Laws Article I(s) and Article III, Section 4(g); see
also Amendment No. 2.
41 See BATS Exchange Amended and Restated
By-Laws Article IV, Section 1(b).
42 See BATS Exchange Amended and Restated
By-Laws Article III, Section 2.
43 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 2. The Nominating
Committee will be comprised of at least three
directors, and the number of Non-Industry members
on the Nominating Committee must equal or exceed
the number of Industry members.
44 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 3. The Member
Nominating Committee will be comprised of at least
three directors, and each member of the Member
Nominating Committee shall be a Member
Representative member.
45 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 1.
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
candidates to serve on the succeeding
year’s Nominating Committee or
Member Nominating Committee, as
applicable. Additional candidates for
the Member Nominating Committee
may be nominated and elected by BATS
Exchange Members pursuant to a
petition process.46
The Nominating Committee will
nominate candidates for each director
position other than the Member
Representative Directors, and BATS
Holdings, as the sole shareholder, will
elect those directors. The Member
Nominating Committee will nominate
candidates for each Member
Representative Director position on the
Exchange Board.47 Additional
candidates may be nominated for the
Member Representative Director
positions by BATS Exchange Members
pursuant to a petition process.48 If no
candidates are nominated pursuant to a
petition process, then the initial
nominees of the Member Nominating
Committee will be nominated as
Member Representative Directors by the
Nominating Committee. If a petition
process produces additional candidates,
then the candidates nominated pursuant
to a petition process, together with those
nominated by the Member Nominating
Committee, will be presented to BATS
Exchange Members for election to
determine the final nomination of
Member Representative Directors.49 The
candidates who receive the most votes
will be nominated as Member
Representative Directors by the
Nominating Committee.50 BATS
Holdings, as the sole shareholder, will
elect those candidates nominated by the
Nominating Committee as Member
Representative Directors.51
46 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 1.
47 The Member Nominating Committee will
solicit comments from BATS Exchange Members for
the purpose of approving and submitting names of
candidates for election to the position of Member
Representative Director. See BATS Exchange
Amended and Restated By-Laws Article III, Section
4(b).
48 See BATS Exchange Amended and Restated
By-Laws Article III, Section 4(c). The petition must
be signed by Executive Representatives of ten
percent or more of the Exchange members. No
Exchange member, together with its affiliates, may
account for more than fifty percent of the signatures
endorsing a particular candidate. Id.
49 See BATS Exchange Amended and Restated
By-Laws Article III, Section 4(e) and (f). Each BATS
Exchange Member shall have the right to cast one
vote for each available Member Representative
Director nomination, provided that any such vote
must be cast for a person on the List of Candidates
and that no BATS Exchange Member, together with
its affiliates, may account for more than twenty
percent of the votes cast for a candidate. Id.
50 See BATS Exchange Amended and Restated
By-Laws Article III, Section 4(f).
51 Id.
E:\FR\FM\21AUN1.SGM
21AUN1
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
The Commission believes that the
requirement in the BATS Exchange
Amended and Restated By-Laws that
twenty percent of the directors be
Member Representative Directors and
the means by which they are chosen by
members provides for the fair
representation of members in the
selection of directors and the
administration of BATS Exchange
consistent with the requirement in
Section 6(b)(3) of the Act.52 As the
Commission has previously noted, this
requirement helps to ensure that
members have a voice in the use of selfregulatory authority, and that an
exchange is administered in a way that
is equitable to all those who trade on its
market or through its facilities.53
The Commission has previously
stated its belief that the inclusion of
public, non-industry representatives on
exchange oversight bodies is critical to
an exchange’s ability to protect the
public interest.54 Further, public, nonindustry representatives help to ensure
that no single group of market
participants has the ability to
systematically disadvantage other
market participants through the
exchange governance process. The
Commission believes that public
directors can provide unique, unbiased
perspectives, which should enhance the
ability of the Exchange Board to address
issues in a non-discriminatory fashion
and foster the integrity of BATS
Exchange.55 The Commission believes
that the Exchange Board satisfies the
requirements in Section 6(b)(3) of the
Act,56 which requires that one or more
directors be representative of issuers
and investors and not be associated with
a member of the exchange, or with a
broker or dealer.57
b. BATS Exchange Committees
In the BATS Exchange Amended and
Restated By-Laws, BATS Exchange has
proposed to establish several
committees. Specifically, BATS
52 15
U.S.C. 78f(b)(3).
Nasdaq Exchange Registration Order and
NYSE/Archipelago Merger Approval Order, supra
note 29.
54 See, e.g., Regulation of Exchanges and
Alternative Trading Systems, Securities Exchange
Act Release No. 40760 (December 8, 1998), 63 FR
70844 (December 22, 1998) (‘‘Regulation ATS
Release’’).
55 See Nasdaq Exchange Registration Order and
NYSE/Archipelago Merger Approval Order, supra
note 29.
56 15 U.S.C. 78f(b)(3).
57 The number of Non-Industry Directors on the
Exchange Board must equal or exceed the sum of
the Industry and Member Representative Directors,
and the Exchange Board must include at least one
Independent Director. See BATS Exchange
Amended and Restated By-Laws Article III, Section
2(b)(i).
mstockstill on PROD1PC66 with NOTICES
53 See
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
Exchange has proposed to establish the
following committees that would be
appointed by the Chairman of the
Exchange Board, with the approval of
the Exchange Board: A Compensation
Committee; 58 Audit Committee; 59
Regulatory Oversight Committee; 60
Appeals Committee; 61 Executive
Committee; 62 and Finance Committee.63
In addition, BATS Exchange has
proposed to establish a Nominating
Committee 64 and a Member Nominating
Committee, which would be elected on
an annual basis by vote of
stockholders.65 For the reasons
discussed above, the Commission
believes that BATS Exchange’s
proposed committees should enable
BATS Exchange to carry out its
responsibilities under the Act and are
consistent with the Act.
B. Regulation of BATS Exchange
As a prerequisite for the
Commission’s approval of an exchange’s
application for registration, an exchange
must be organized and have the capacity
to carry out the purposes of the Act.66
Specifically, an exchange must be able
58 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(a). The Compensation
Committee will be comprised of at least three
people, and each voting member of the
Compensation Committee shall be a Non-Industry
Director. Id.
59 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(b). The Audit
Committee will be comprised of at least three
people, and a majority of the Audit Committee
members shall be Non-Industry Directors and a
Non-Industry Director shall serve as Chairman of
the Audit Committee. Id.
60 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(c). The Regulatory
Oversight Committee will be comprised of at least
three people, and each member of the Regulatory
Oversight Committee shall be a Non-Industry
Director. Id.
61 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(d). The Appeals
Committee shall consist of one Independent
Director, one Industry Director, and one Member
Representative Director. Id.
62 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(e). The number of
Non-Industry Directors on the Executive Committee
shall equal or exceed the number of Industry
Directors. The percentage of Independent Directors
on the Executive Committee shall be at least as great
as the percentage of Independent Directors on the
whole Exchange Board, and the percentage of
Member Representative Directors on the Executive
Committee shall be at least as great as the
percentage of Member Representative Directors on
the whole Exchange Board. Id.
63 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(f).
64 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 2, and supra note 43.
65 See BATS Exchange Amended and Restated
By-Laws Article VI, Section 1, and supra note 44.
Additional candidates for the Member Nominating
Committee may be nominated and elected by BATS
Exchange members pursuant to a petition process.
See supra note 48 and accompanying text.
66 See Section 6(b)(1) of the Act, 15 U.S.C.
78f(b)(1).
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
49501
to enforce compliance by its members,
and persons associated with its
members, with the federal securities
laws and the rules of the exchange.67
1. Membership
Membership on BATS Exchange will
be open to any registered broker or
dealer that is a member of another
registered national securities exchange
or association, or any natural person
associated with such a registered broker
or dealer.68 To remain eligible for
membership in BATS Exchange, a BATS
Exchange member must be a member of
another SRO at all times.69
For a temporary 90-day period after
approval of BATS Exchange’s
application, an applicant that is an
active member of another SRO and is a
current or former subscriber to the
BATS ECN will be able to apply through
an expedited process to become a BATS
Exchange member, and to register with
BATS Exchange all of its associated
persons whose registrations are active at
the time BATS Exchange is approved as
a national securities exchange, by
submitting a waive-in application form,
including membership agreements.70
BATS Exchange may request additional
documentation in addition to the waivein application form in order to
determine that a waive-in applicant
meets BATS Exchange’s qualification
standards.71 All of the firm’s associated
persons who are registered in categories
recognized by BATS Exchange rules
would become registered persons of a
BATS Exchange member firm.72
All other applicants (and after the 90day period has ended, those that could
have waived in through the expedited
process) may apply for membership in
BATS Exchange by submitting a full
membership application to BATS
Exchange.73 Applications for
association with an Exchange Member
shall be submitted to the Exchange on
Form U–4 and such other forms as
BATS Exchange may prescribe.
BATS Exchange will receive and
review all applications for membership
in the Exchange. If the Exchange is
satisfied that the applicant is qualified
for membership, the Exchange will
promptly notify the applicant, in
writing, of such determination, and the
applicant shall be a member of the
67 Id. See also Section 19(g) of the Act, 15 U.S.C.
78s(g).
68 See BATS Exchange Rules 2.3 and 2.5(a)(4) and
Amendment No. 2.
69 Id.
70 See BATS Exchange Rule 2.4.
71 Id.
72 Id.
73 See BATS Exchange Rule 2.6 and Amendment
No. 2.
E:\FR\FM\21AUN1.SGM
21AUN1
49502
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
Exchange.74 If the Exchange is not
satisfied that the applicant is qualified
for membership, the Exchange shall
promptly notify the applicant of the
grounds for denial.75 Once an applicant
is a member of the Exchange, it must
continue to possess all the qualifications
set forth in the BATS Exchange rules.
When the Exchange has reason to
believe that an Exchange member or
associated person of a member fails to
meet such qualifications, the Exchange
may suspend or revoke such person’s
membership or association.76
Appeal of a staff denial, suspension,
or termination of membership will be
heard by the Appeals Committee.77
Decisions of the Appeals Committee
will be made in writing and will be sent
to the parties to the proceeding. The
decisions of the Appeals Committee will
be subject to review by the Exchange
Board, on its own motion, or upon
written request by the aggrieved party or
by the Chief Regulatory Officer (‘‘CRO’’).
The Exchange Board will have sole
discretion to grant or deny the request.
The Exchange Board will conduct the
review of the Appeals Committee’s
decision. The Exchange Board may
affirm, reverse, or modify the Appeals
Committee’s decision. The Exchange
Board’s decision is final.78
The Commission finds that the BATS
Exchange’s membership rules are
consistent with Section 6 of the Act,79
specifically Section 6(b)(2) of the Act,80
which requires that a national securities
exchange have rules that provide that
any registered broker or dealer or
natural person associated with such
broker or dealer may become a member
and any person may become associated
with an exchange member. The
Commission notes that pursuant to
Section 6(c) of the Act, an exchange
must deny membership to any person,
other than a natural person, that is not
a registered broker or dealer, any natural
person that is not, or is not associated
with, a registered broker or dealer, and
registered broker-dealers that do not
satisfy certain standards, such as
financial responsibility or operational
capacity. As a registered exchange,
BATS Exchange must independently
determine if an applicant satisfies the
74 See
BATS Exchange Rule 2.6(c).
BATS Exchange Rule 2.6(d).
76 See BATS Exchange Rule 2.7; see also BATS
Exchange Rules Chapters VII and VIII.
77 See BATS Exchange Rule 10.3; see also BATS
Exchange Amended and Restated By-Laws Article
V, Section 6(d).
78 See BATS Exchange Rule 10.5(b). Membership
decisions are subject to review by the Commission.
See BATS Exchange Rule 10.7.
79 15 U.S.C. 78f.
80 5 U.S.C. 78f(b)(2).
mstockstill on PROD1PC66 with NOTICES
75 See
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
standards set forth in the Act, regardless
of whether an applicant is a member of
another SRO.81
2. Regulatory Independence
BATS Exchange has proposed several
measures to help ensure the
independence of its regulatory function
from its market operations and other
commercial interests. The regulatory
operations of BATS Exchange will be
supervised by the CRO and monitored
by the Regulatory Oversight Committee.
The Regulatory Oversight Committee
will consist of three members, each of
whom must be a Non-Industry
Director.82 The Regulatory Oversight
Committee will be responsible for
monitoring the adequacy and
effectiveness of the Exchange’s
regulatory program, assessing the
Exchange’s regulatory performance, and
assisting the Exchange Board in
reviewing the Exchange’s regulatory
plan and the overall effectiveness of the
Exchange’s regulatory functions.83 The
Regulatory Oversight Committee also
will meet with the CRO in executive
session at regularly scheduled meetings
and at any time upon request of the CRO
or any member of the Regulatory
Oversight Committee.84
BATS Exchange proposes that its CRO
have general supervision of the
regulatory operations of the Exchange,
including overseeing surveillance,
examination, and enforcement
functions.85 The CRO also will
administer any regulatory services
agreement with another SRO to which
BATS Exchange is a party.86 The CRO
will be an Executive Vice President or
Senior Vice President that reports
directly to the Chief Executive Officer.87
The CRO also may serve as BATS
Exchange’s General Counsel.88 In
addition, any revenues received by
BATS Exchange from fees derived from
its regulatory function or regulatory
penalties will not be used for nonregulatory purposes.89
The Commission is concerned about
the potential for unfair competition and
conflicts of interest between an
exchange’s self-regulatory obligations
81 See Nasdaq Exchange Registration Order, supra
note 29.
82 See BATS Exchange Amended and Restated
By-Laws Articles I(v) and V, Section 6(c).
83 See BATS Exchange Amended and Restated
By-Laws Article V, Section 6(c).
84 See BATS Exchange Amended and Restated
By-Laws Article VII, Section 9.
85 Id.
86 Id.
87 Id.
88 Id. See Nasdaq Exchange Registration Order,
supra note 29.
89 See BATS Exchange Amended and Restated
By-Laws Article X, Section 4.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
and its commercial interests that could
exist if an exchange were to otherwise
become affiliated with one of its
members, as well as the potential for
unfair competitive advantage that the
affiliated member could have by virtue
of informational or operational
advantages, or the ability to receive
preferential treatment.90 BATS
Exchange Rule 2.10 provides that
without the prior approval of the
Commission, BATS Exchange or any
entity with which it is affiliated shall
not, directly or indirectly, acquire or
maintain an ownership interest in a
BATS Exchange member, and a BATS
Exchange member shall not be or
become an affiliate of BATS Exchange,
or an affiliate of any affiliate of the
Exchange.91 BATS Exchange also has
proposed for Commission approval
BATS Exchange Rule 2.11, which
provides that BATS Trading, a
registered broker-dealer, will provide an
Outbound Router function as a facility
of the Exchange pursuant to certain
conditions and limitations.92 BATS
Trading is an affiliate of BATS Exchange
and will become a member of BATS
Exchange. This affiliation would not be
consistent with proposed Rule 2.10
absent prior Commission approval. As
part of the approval today of BATS
Exchange’s application for registration
as a national securities exchange, the
Commission is approving BATS
Exchange Rule 2.11.
The Commission believes that the
Exchange’s proposal is consistent with
the Act, particularly with Section
6(b)(1), which requires an exchange to
be so organized and have the capacity
to carry out the purposes of the Act.93
Although the Commission continues to
be concerned about potential unfair
competition and conflict of interest
between an exchange’s self-regulatory
obligations and its commercial interests
when an exchange is affiliated with one
of its members, the Commission
believes that it is consistent with the
Act to permit BATS Trading to become
an affiliate of BATS Exchange for the
limited Outbound Router function, in
light of the protections afforded by the
conditions and limitations imposed in
BATS Exchange’s rules.94
90 See, e.g., Securities Exchange Act Release No.
53382 (February 27, 2006), 71 FR 11251 (March 6,
2006).
91 See BATS Exchange Rule 2.10.
92 See infra Section III.E.
93 See 15 U.S.C. 78f(b)(1).
94 See infra Section III.E. The Commission has
approved similar arrangements for other SROs. See,
e.g., Securities Exchange Act Release Nos. 57478
(March 12, 2008), 73 FR 14521 (March 18, 2008)
(SR–NASDAQ–2007–004) (‘‘NOM Approval
Order’’) and 54391 (August 31, 2006), 71 FR 52836
E:\FR\FM\21AUN1.SGM
21AUN1
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
mstockstill on PROD1PC66 with NOTICES
3. Regulatory Contract
Although BATS Exchange will be an
SRO with all of the attendant regulatory
obligations under the Act, it has entered
into a regulatory contract with FINRA
(‘‘Regulatory Contract’’), under which
FINRA will perform certain regulatory
functions on BATS Exchange’s behalf.95
Specifically, BATS Exchange represents
that FINRA will assist Exchange staff on
registration issues on an as-needed
basis, investigate potential violations of
BATS Exchange’s rules or federal
securities laws related to activity on the
Exchange, conduct examinations related
to market conduct on the Exchange by
Members, assist the Exchange with
disciplinary proceedings pursuant to
BATS Exchange’s Rules, including
issuing charges and conducting
hearings, and provide dispute resolution
services to BATS Exchange Members on
behalf of the Exchange, including
operation of the Exchange’s arbitration
program. BATS Exchange represents
that FINRA also will provide the
Exchange with access to FINRA’s
WebCRD system, and will assist with
programming BATS-specific
functionality relating to such system.96
Notwithstanding the Regulatory
Contract, BATS Exchange will retain
ultimate legal responsibility for the
regulation of its members and its
market.
The Commission believes that it is
consistent with the Act to allow BATS
Exchange to contract with FINRA to
perform examination, enforcement, and
disciplinary functions.97 These
functions are fundamental elements to a
regulatory program, and constitute core
self-regulatory functions. It is essential
to the public interest and the protection
of investors that these functions are
carried out in an exemplary manner,
and the Commission believes that
FINRA has the expertise and experience
to perform these functions on behalf of
BATS Exchange.98
(September 7, 2006) (SR–NSX–2006–08) (‘‘NSX
Blade Approval Order’’).
95 See BATS Exchange Rule 13.7; see also
Amendment No. 2. Pursuant to the applicable
provisions of the Freedom of Information Act, 5
U.S.C. 552, and Commission regulations
thereunder, 17 CFR 200.83, BATS Exchange has
requested confidential treatment for the Regulatory
Contract.
96 See Amendment No. 2.
97 See, e.g., Regulation ATS Release, supra note
54. See also Securities Exchange Act Release 50122
(July 29, 2004), 69 FR 47962 (August 6, 2004) (SR–
Amex–2004–32) (order approving rule that allowed
Amex to contract with another SRO for regulatory
services) (‘‘Amex Regulatory Services Approval
Order’’); NOM Approval Order, supra note 94; and
Nasdaq Exchange Registration Order, supra note 29.
98 See Amex Regulatory Services Approval Order,
supra note 97; NOM Approval Order, supra note 94;
and Nasdaq Exchange Registration Order, supra
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
At the same time, BATS Exchange,
unless relieved by the Commission of its
responsibility,99 bears the responsibility
for self-regulatory conduct and primary
liability for self-regulatory failures, not
the SRO retained to perform regulatory
functions on the Exchange’s behalf. In
performing these regulatory functions,
however, FINRA may nonetheless bear
liability for causing or aiding and
abetting the failure of BATS Exchange to
perform its regulatory functions.100
Accordingly, although FINRA will not
act on its own behalf under its SRO
responsibilities in carrying out these
regulatory services for BATS Exchange,
FINRA may have secondary liability if,
for example, the Commission finds that
the contracted functions are being
performed so inadequately as to cause a
violation of the federal securities laws
by BATS Exchange.101
Although BATS Exchange has entered
into the Regulatory Contact, the
provisions in the Regulatory Contract
that will specify the particular BATS
Exchange and Commission rules for
which FINRA will provide certain
regulatory functions have not been
finalized. Accordingly, the Commission
is conditioning the operation of BATS
Exchange on the execution of the
Regulatory Contract and finalization of
the provisions in the Regulatory
Contract that will specify the BATS
Exchange and Commission rules for
which FINRA will provide regulatory
functions.102
4. 17d–2 Agreement
Section 19(g)(1) of the Act 103 requires
every SRO to examine its members and
persons associated with its members
and to enforce compliance with the
federal securities laws and the SRO’s
own rules, unless the SRO is relieved of
this responsibility pursuant to Section
note 29. The Commission notes that the Regulatory
Contract is not before the Commission and,
therefore, the Commission is not acting on it.
99 See Section 17(d)(1) of the Act and Rule 17d–
2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR
240.17d–2. See also infra notes 103–110 and
accompanying text.
100 For example, if failings by FINRA have the
effect of leaving BATS Exchange in violation of any
aspect of BATS Exchange’s self-regulatory
obligations, BATS Exchange would bear direct
liability for the violation, while FINRA may bear
liability for causing or aiding and abetting the
violation. See Nasdaq Exchange Registration Order,
supra note 29 and Securities Exchange Act Release
No. 42455 (February 24, 2000), 65 FR 11388 (March
2, 2000) (File No. 10–127) (order approving the
International Securities Exchange LLC’s application
for registration as a national securities exchange).
101 Id.
102 Alternatively, BATS Exchange could
demonstrate that it has the ability to fulfill its
regulatory obligations.
103 15 U.S.C. 78s(g)(1).
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
49503
17(d) of the Act.104 Section 17(d) was
intended, in part, to eliminate
unnecessary multiple examinations and
regulatory duplication with respect to
members of more than one SRO
(‘‘common members’’).105 Rule 17d–2 of
the Act permits SROs to propose joint
plans allocating regulatory
responsibilities concerning common
members.106 These agreements, which
must be filed with and approved by the
Commission, generally cover such
regulatory functions as personnel
registration, branch office examinations,
and sales practices. Commission
approval of a 17d–2 plan relieves the
specified SRO of those regulatory
responsibilities allocated by the plan to
another SRO.107 Many existing SROs
have entered in to such agreements.108
BATS Exchange has represented to
the Commission that BATS Exchange
and FINRA intend to file a 17d–2
agreement with the Commission
covering common members of BATS
Exchange and FINRA. This agreement
would allocate to FINRA regulatory
responsibility, with respect to common
members, for the following:
• FINRA will examine common
members of BATS Exchange and FINRA
for compliance with federal securities
laws, rules and regulations, and rules of
BATS Exchange that have been certified
by BATS Exchange as identical or
substantially similar to FINRA rules.
• FINRA will investigate common
members of BATS Exchange and FINRA
for violations of federal securities laws,
rules or regulations, or BATS Exchange
rules that has been certified by BATS
Exchange as identical or substantially
identical to a FINRA rule.
• FINRA will enforce compliance by
common members with federal
securities laws, rules and regulations,
and rules of BATS Exchange that have
been certified by BATS Exchange as
104 15
U.S.C. 78q(d).
Securities Exchange Act Release No.
12935 (October 28, 1976), 41 FR 49091 (November
8, 1976) (‘‘Rule 17d–2 Adopting Release’’).
106 17 CFR 240.17d–2.
107 See Rule 17d–2 Adopting Release, supra note
105.
108 See, e.g., Securities Exchange Act Release Nos.
13326 (March 3, 1977), 42 FR 13878 (March 14,
1977) (NYSE/Amex); 13536 (May 12, 1977), 42 FR
26264 (May 23, 1977) (NYSE/BSE); 14152
(November 9, 1977), 42 FR 59339 (November 16,
1977) (NYSE/CSE); 13535 (May 12, 1977), 42 FR
26269 (May 23, 1977) (NYSE/CHX); 13531 (May 12,
1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE);
14093 (October 25, 1977), 42 FR 57199 (November
1, 1977) (NYSE/Phlx); 15191 (September 26, 1978),
43 FR 46093 (October 5, 1978) (NASD/BSE, CSE,
CHX and PSE); 16858 (May 30, 1980), 45 FR 37927
(June 5, 1980) (NASD/BSE, CSE, CHX and PSE);
42815 (May 23, 2000), 65 FR 34762 (May 31, 2000)
(NASD/ISE); and 54136 (July 12, 2006), 71 FR
40759 (July 18, 2006) (NASD/Nasdaq).
105 See
E:\FR\FM\21AUN1.SGM
21AUN1
49504
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
identical or substantially similar to
FINRA rules.
Because BATS Exchange anticipates
entering into this 17d–2 agreement, it
has not made provision to fulfill the
regulatory obligations that would be
undertaken by FINRA under this
agreement with respect to common
members of BATS Exchange and
FINRA.109 Accordingly, the Commission
is conditioning the operation of BATS
Exchange on approval by the
Commission of a 17d–2 agreement
between BATS Exchange and FINRA
that allocates the above specified
matters to FINRA.110
mstockstill on PROD1PC66 with NOTICES
5. Discipline and Oversight of Members
As noted above, a prerequisite for the
Commission approval of an exchange’s
application for registration, an exchange
must be organized and have the capacity
to carry out the purposes of the Act.
Specifically, an exchange must be able
to enforce compliance by its members
and persons associated with its
members with federal securities laws
and the rules of the exchange.111 As
noted above, pursuant to the Regulatory
Contract, FINRA will perform many of
the initial disciplinary processes on
behalf of BATS Exchange.112 For
example, FINRA will investigate
potential securities laws violations,
issue complaints, and conduct hearings
pursuant to BATS Exchange rules.
Appeals from disciplinary decisions
will be heard by the Appeals
Committee 113 and the Appeals
Committee’s decision shall be final. In
addition, the Exchange Board may on its
own initiative order review of a
disciplinary decision.114
The BATS Amended and Restated ByLaws and BATS Exchange rules provide
that the Exchange has disciplinary
jurisdiction over its members so that it
can enforce its members’ compliance
with its rules and the federal securities
laws.115 The Exchange’s rules also
permit it to sanction members for
violations of its rules and violations of
the federal securities laws by, among
other things, expelling or suspending
members, limiting members’ activities,
109 The Commission notes that regulation that is
to be covered by the 17d–2 agreement for common
members will be carried out by FINRA under the
Regulatory Contract for BATS Exchange members
that are not also members of FINRA.
110 Alternatively, BATS Exchange could
demonstrate that it has the ability to fulfill its
regulatory obligations.
111 See 15 U.S.C. 78f(b)(1).
112 See supra note 97 and accompanying text.
113 See BATS Exchange Rule 8.10(b).
114 See BATS Exchange Rule 8.10(c).
115 See generally BATS Exchange Amended and
Restated By-Laws Article X and BATS Exchange
Rules Chapters II and VIII.
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
functions, or operations, fining or
censuring members, or suspending or
barring a person from being associated
with a member, or any other fitting
sanction.116 BATS Exchange’s rules also
provide for the imposition of fines for
certain minor rule violations in lieu of
commencing disciplinary
proceedings.117 Accordingly, as a
condition to the operation of BATS
Exchange, a Minor Rule Violation Plan
(‘‘MRVP’’) filed by BATS Exchange
under Act Rule 19d–1(c)(2) must be
declared effective by the
Commission.118
The Commission finds that the BATS
Exchange’s Amended and Restated ByLaws and rules concerning its
disciplinary and oversight programs are
consistent with the requirements of
Sections 6(b)(6) and 6(b)(7) 119 of the Act
in that they provide fair procedures for
the disciplining of members and
persons associated with members. The
Commission further finds that the rules
of BATS Exchange provide it with the
ability to comply, and with the
authority to enforce compliance by its
members and persons associated with
its members, with the provisions of the
Act, the rules and regulations
thereunder, and the rules of BATS
Exchange.120
C. BATS Exchange Trading System
1. Trading Rules
BATS Exchange will operate a fully
automated electronic order book.
Exchange members and entities that
enter into sponsorship arrangements
with Exchange members will have
access to the BATS Exchange system
(collectively, ‘‘Users’’).121 Users will be
able to electronically submit market and
various types of limit orders to the
Exchange from remote locations. All
orders submitted to BATS Exchange
will be displayed unless designated
otherwise by the BATS Exchange
member submitting the order. Displayed
orders will be displayed on an
anonymous basis at a specified price.
Non-displayed orders will not be
displayed but will be ranked in the
BATS Exchange system at a specified
price.122 The BATS Exchange system
116 See
BATS Exchange Rules 2.2 and 8.1(a).
117 See BATS Exchange Rule 8.15 and
Amendment No. 2.
118 17 CFR 240.19d–1(c)(2).
119 15 U.S.C. 78f(b)(6) and (b)(7).
120 See Section 6(b)(1) of the Act, 15 U.S.C.
78f(b)(1).
121 To obtain authorized access to the BATS
Exchange System, each User must enter in to a User
Agreement with the Exchange. See BATS Exchange
Rule 11.3(a).
122 BATS Exchange rules do not provide for
specialists or market makers.
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
will continuously and automatically
match orders pursuant to price/time
priority, except that displayed orders
will have priority over non-displayed
orders at the same price.123
The BATS Exchange system is
designed to comply with Rule 611 of
Regulation NMS 124 by requiring that,
for any execution to occur on the
Exchange during regular trading hours,
the price must be equal to, or better
than, any ‘‘protected quotation’’ within
the meaning of Regulation NMS
(‘‘Protected Quotation’’), unless an
exception to Rule 611 of Regulation
NMS applies.125 BATS Exchange will
direct any orders or portion of orders
that cannot be executed in their entirety
to away markets for execution through
BATS Trading, unless the terms of the
orders direct the Exchange not to route
such orders away.126
BATS Exchange intends to operate as
an automated trading center in
compliance with Rule 600(b)(4) of
Regulation NMS.127 BATS Exchange
will display automated quotations at all
times except in the event that a systems
malfunction renders the system
incapable of displaying automated
quotations.128 The Exchange has
designed its rules relating to orders,
modifiers, and order execution to
comply with the requirements of
Regulation NMS, including an
immediate-or-cancel functionality.129
These proposed rules include accepting
orders marked as intermarket sweep
orders, which will allow orders so
designated to be automatically matched
and executed without reference to
Protected Quotations at other trading
centers,130 and routing orders marked as
intermarket sweep orders by a User to
a specific trading center for
execution.131 In addition, BATS
Exchange rules address locked and
crossed markets,132 as required by Rule
610(d) of Regulation NMS.133 The
Commission believes that BATS
Exchange’s rules are consistent with the
Act, in particular with the requirements
of Rule 610(d) and Rule 611 of
Regulation NMS.
As stated above, BATS Exchange
intends to operate as an automated
123 See
BATS Exchange Rule 11.8.
CFR 242.611.
125 See BATS Exchange Rule 11.9.
126 See BATS Exchange Rule 11.9(a)(2).
127 17 CFR 242.600(b)(4).
128 See BATS Exchange Rule 11.9(c); see also 17
CFR 242.600(b)(3).
129 See BATS Exchange Rules 11.5 and 11.9; see
also 17 CFR 242.600(b)(3).
130 See BATS Exchange Rule 11.5(d)(1).
131 See BATS Exchange Rule 11.5(d)(2).
132 See BATS Exchange Rule 11.16.
133 17 CFR 242.610(d).
124 17
E:\FR\FM\21AUN1.SGM
21AUN1
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
trading center and have its best bid and
best offer be a Protected Quotation.134
To meet their regulatory responsibilities
under Rule 611(a) of Regulation NMS,
market participants must have sufficient
notice of new Protected Quotations, as
well as all necessary information (such
as final technical specifications).135
Therefore, the Commission believes that
it would be a reasonable policy and
procedure under Rule 611(a) for
industry participants to begin treating
BATS Exchange’s best bid and best offer
as a Protected Quotation within 90 days
after the date of this order, or such later
date as BATS Exchange begins
operation as a national securities
exchange.
2. Section 11 of the Act
Section 11(a)(1) of the Act 136
prohibits a member of a national
securities exchange from effecting
transactions on that exchange for its
own account, the account of an
associated person, or an account over
which it or its associated person
exercises discretion (collectively,
‘‘covered accounts’’) unless an
exception applies. Rule 11a2–2(T) 137
under the Act, known as the ‘‘effect
versus execute’’ rule, provides exchange
members with an exemption from the
Section 11(a)(1) prohibition. Rule 11a2–
2(T) permits an exchange member,
subject to certain conditions, to effect
transactions for covered accounts by
arranging for an unaffiliated member to
execute the transactions on the
exchange. To comply with Rule 11a2–
2(T)’s conditions, a member: (i) Must
transmit the order from off the exchange
floor; (ii) may not participate in the
execution of the transaction once it has
been transmitted to the member
performing the execution; 138 (iii) may
not be affiliated with the executing
member; and (iv) with respect to an
account over which the member has
investment discretion, neither the
member nor its associated person may
retain any compensation in connection
with effecting the transaction except as
provided in the Rule.
In a letter to the Commission,139
BATS Exchange requested that the
Commission concur with BATS
134 17
CFR 242.600(b)(58).
Securities Exchange Act Release No.
53829 (May 18, 2006), 71 FR 30038, 30041 (May 24,
2006).
136 15 U.S.C. 78k(a)(1).
137 17 CFR 240.11a2–2(T).
138 The member may, however, participate in
clearing and settling the transaction.
139 See letter to David Shillman, Associate
Director, Division of Trading and Markets,
Commission, from J. Craig Long, Foley & Lardner
LLP, dated June 24, 2008 (‘‘BATS Exchange 11(a)
Letter’’).
mstockstill on PROD1PC66 with NOTICES
135 See
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
Exchange’s conclusion that BATS
Exchange members that enter orders
into the BATS Exchange system satisfy
the requirements of Rule 11a2–2(T). For
reasons set forth below, the Commission
believes that BATS Exchange members
entering orders into the BATS Exchange
system would satisfy the conditions of
the Rule.
The Rule’s first condition is that
orders for covered accounts be
transmitted from off the exchange floor.
The BATS Exchange system receives
orders electronically through remote
terminals or computer-to-computer
interfaces. In the context of other
automated trading systems, the
Commission has found that the off-floor
transmission requirement is met if a
covered account order is transmitted
from a remote location directly to an
exchange’s floor by electronic means.140
Since the BATS Exchange system
receives orders electronically through
remote terminals or computer-tocomputer interfaces, the Commission
believes that the BATS Exchange system
satisfies the off-floor transmission
requirement.
Second, the rule requires that the
member not participate in the execution
of its order. BATS Exchange represented
that at no time following the submission
of an order is a member able to acquire
control or influence over the result or
timing of an order’s execution.141
140 See, e.g., Nasdaq Exchange Registration Order,
supra note 29; and Securities Exchange Act Release
Nos. 49068 (January 13, 2004), 69 FR 2775 (January
20, 2004) (order approving the Boston Options
Exchange as an options trading facility of the
Boston Stock Exchange); 44983 (October 25, 2001),
66 FR 55225 (November 1, 2001) (order approving
Archipelago Exchange (‘‘ArcaEx’’) as electronic
trading facility of the Pacific Exchange (‘‘PCX’’)
(‘‘ArcaEx Order’’)); 29237 (May 24, 1991), 56 FR
24853 (May 31, 1991) (regarding NYSE’s Off-Hours
Trading Facility); 15533 (January 29, 1979), 44 FR
6084 (January 31, 1979) (regarding the American
Stock Exchange (‘‘Amex’’) Post Execution Reporting
System, the Amex Switching System, the
Intermarket Trading System, the Multiple Dealer
Trading Facility of the Cincinnati Stock Exchange,
the PCX Communications and Execution System,
and the Philadelphia Stock Exchange’s (‘‘Phlx’’)
Automated Communications and Execution System
(‘‘1979 Release’’)); and 14563 (March 14, 1978), 43
FR 11542 (March 17, 1978) (regarding the NYSE’s
Designated Order Turnaround System (‘‘1978
Release’’)).
141 See BATS Exchange 11(a) Letter, supra note
139. The member may cancel or modify the order,
or modify the instructions for executing the order,
but only from off the Exchange floor. Id. The
Commission has stated that the non-participation
requirement is satisfied under such circumstances
so long as such modifications or cancellations are
also transmitted from off the floor. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542 (March 17, 1978) (stating that the
‘‘non-participation requirement does not prevent
initiating members from canceling or modifying
orders (or the instructions pursuant to which the
initiating member wishes orders to be executed)
after the orders have been transmitted to the
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
49505
According to BATS Exchange, the
execution of a member’s order is
determined solely by what orders, bids,
or offers are present in the system at the
time the member submits the order.
Accordingly, the Commission believes
that a BATS Exchange member would
not participate in the execution of an
order submitted into the BATS
Exchange system.
Third, Rule 11a2–2(T) requires that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
requirement is satisfied when
automated exchange facilities, such as
the BATS Exchange system, are used, as
long as the design of these systems
ensures that members do not possess
any special or unique trading
advantages in handling their orders after
transmitting them to the exchange.142
BATS Exchange has represented that the
design of the BATS Exchange system
ensures that no member has any special
or unique trading advantage in the
handling of its orders after transmitting
its orders to BATS Exchange.143 Based
on BATS Exchange’s representation, the
Commission believes that the BATS
Exchange system satisfies this
requirement.
Fourth, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T).144 BATS Exchange
executing member, provided that any such
instructions are also transmitted from off the
floor’’).
142 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that while there is no
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the systems. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release, supra note 140.
143 See BATS Exchange 11(a) Letter, supra note
139.
144 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated person thereof exercises
E:\FR\FM\21AUN1.SGM
Continued
21AUN1
49506
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
represented that BATS Exchange
members trading for covered accounts
over which they exercise investment
discretion must comply with this
condition in order to rely on the rule’s
exemption.145
mstockstill on PROD1PC66 with NOTICES
D. Section 11A of the Act
Section 11A of the Act and the rules
thereunder form the basis of our
national market system and impose
requirements on exchanges to
implement its objectives. Specifically,
national securities exchanges are
required, under Rule 601 of Regulation
NMS,146 to file transaction reporting
plans regarding transactions in listed
equity and Nasdaq securities that are
executed on their facilities. Currently
registered exchanges satisfy this
requirement by participating in the
Consolidated Transaction Association
Plan (‘‘CTA Plan’’) for listed equities
and the Joint Self-Regulatory
Organization Plan Governing the
Collection, Consolidation and
Dissemination of Quotation and
Transaction Information for NasdaqListed Securities Traded on Exchanges
on an Unlisted Trading Privileges Basis
(‘‘Nasdaq UTP Plan’’) for Nasdaq
securities.147 Before BATS Exchange
can begin operating as an exchange, it
must join these plans as a participant.
National securities exchanges are
required, under Rule 602 of Regulation
NMS,148 to collect bids, offers, quotation
sizes and aggregate quotation sizes from
those members who are responsible
broker or dealers. National securities
exchanges must then make this
information available to vendors at all
times when the exchange is open for
trading. The current exchanges satisfy
this requirement by participating in the
Consolidated Quotation System Plan
(‘‘CQ Plan’’) for listed equity securities
investment discretion, to furnish at least annually
to the person authorized to transact business for the
account a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d). See also 1978
Release, supra note 140 (stating ‘‘[t]he contractual
and disclosure requirements are designed to assure
that accounts electing to permit transaction-related
compensation do so only after deciding that such
arrangements are suitable to their interests’’).
145 See BATS Exchange 11(a) Letter, supra note
139.
146 17 CFR 242.601.
147 These plans also satisfy the requirement in
Rule 603 that national securities exchanges and
national securities associations act jointly pursuant
to an effective national market system plan to
disseminate consolidated information, including a
national best bid and offer, and quotations for and
transactions in NMS stocks. See 17 CFR 242.603.
See also Nasdaq Exchange Registration Order, supra
note 29.
148 17 CFR 242.602.
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
and the Nasdaq UTP Plan for Nasdaq
securities. Before BATS Exchange can
begin operating as an exchange it also
must join the CQ Plan as a participant,
in addition to the CTA Plan and the
Nasdaq UTP Plan.
Finally, national securities exchanges
must make available certain order
execution information pursuant to Rule
605 of Regulation NMS.149 Current
exchanges have standardized the
required disclosure mechanisms by
participating in the Order Execution
Quality Disclosure Plan.150 BATS
Exchange must join this plan before it
begins operations as an exchange.
E. Order Routing
As noted above in Section III.A.,
BATS Exchange proposes to offer
routing services to its Users through its
affiliated broker-dealer, BATS Trading.
BATS Trading will provide ‘‘outbound’’
routing of orders from the Exchange to
other trading centers (such function of
BATS Trading is referred to as the
‘‘Outbound Router’’), and BATS Trading
will engage in no other activities unless
approved by the Commission.151 The
Outbound Router function of BATS
Trading will operate as a facility (as
defined in Section 3(a)(2) of the Act) of
the Exchange. As such, the Outbound
Router function of BATS Trading is
subject to the Exchange’s and the
Commission’s continuing oversight. In
particular, and without limitation,
under the Act, the Exchange is
responsible for filing with the
Commission proposed rule changes and
fees relating to the BATS Trading
Outbound Router function and BATS
Trading Outbound Router function will
be subject to exchange nondiscrimination requirements.152
BATS Trading will be a member of
FINRA, an SRO unaffiliated with BATS
Exchange or any of its affiliates, that is
its designated examining authority.153
Also, BATS Exchange will establish and
maintain procedures and internal
controls reasonably designed to restrict
the flow of confidential and proprietary
information between BATS Exchange
and its facilities, and any other entity,
including any affiliate of BATS Trading,
and, if BATS Trading or any of its
affiliates engages in any other business
activities other than the Outbound
Router function, between the segment of
BATS Trading or its affiliate that
provides the other business activities
149 17
CFR 242.605.
Securities Exchange Act Release No.
44177 (April 12, 2001), 66 FR 19814 (April 17,
2001).
151 See BATS Exchange Rule 2.11(a)(4).
152 See BATS Exchange Rule 2.11(a)(1).
153 See BATS Exchange Rule 2.11(a)(2).
150 See
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
and the Outbound Router function.154 In
addition, the books, records, premises,
officers, directors, agents, and
employees of BATS Trading, as a
facility of the Exchange, will be deemed
to be those of the Exchange for purposes
of and subject to oversight pursuant to
the Act.155 Further, Users are not
required to use the Outbound Router
function of BATS Trading to route
orders,156 and a User is free to route its
orders to other market centers through
alternative means.157
In light of the protections discussed
above, the Commission believes that
BATS Exchange rules and procedures
regarding use of BATS Trading to route
orders to away markets are consistent
with the Act.158
F. Listing Requirements/Unlisted
Trading Privileges
BATS Exchange initially does not
intend to list any securities.
Accordingly, BATS Exchange has not
proposed rules that would allow it to
list any securities at this time.159
Instead, BATS Exchange has proposed
to trade securities pursuant to unlisted
trading privileges, consistent with
Section 12(f) of the Act and Rule 12f–
5 thereunder. Rule 12f–5 requires an
exchange that extends unlisted trading
privileges to securities to have in effect
a rule or rules providing for transactions
in the class or type of security to which
the exchange extends unlisted trading
privileges.160 BATS Exchange’s
proposed rules require that any security
traded on the BATS Exchange be
registered under the Act and listed on
the New York Stock Exchange LLC,
NYSE Arca, the American Stock
Exchange LLC, or The NASDAQ Stock
Market LLC. BATS Exchange’s proposed
154 See
BATS Exchange Rule 2.11(a)(5).
BATS Exchange Rule 2.11(b).
156 A User that does not wish to use the Outbound
Router function of BATS Trading could submit an
Immediate-or-Cancel Order or another order type
that is not eligible for order routing pursuant to
BATS Exchange rules, such as a BATS Only Order.
See BATS Exchange Rule 11.5.
157 See BATS Exchange Rule 2.11(a)(3).
158 The Commission has approved similar
arrangements for other SROs. See, e.g., NOM
Approval Order and NSX Blade Approval Order,
supra note 94.
159 BATS Exchange has incorporated listing
standards for certain derivative securities products
in its rules. However, BATS Exchange’s rules will
prohibit BATS Exchange from listing any derivative
security product pursuant to these listing standards
until BATS Exchange submits a proposed rule
change to the Commission to amend its listing
standards to comply with Rule 10A–3 under the Act
and incorporate qualitative listing criteria. See
BATS Exchange Rule 14.1(a).
160 17 CFR 240.12f–5. See also Securities
Exchange Act Release No. 35737 (April 21, 1995),
60 FR 20891 (April 28, 1995) (adopting Rule 12f–
5).
155 See
E:\FR\FM\21AUN1.SGM
21AUN1
Federal Register / Vol. 73, No. 163 / Thursday, August 21, 2008 / Notices
rules provide for transactions in the
class or type of security to which the
exchange intends to extend unlisted
trading privileges.161 In addition,
pursuant to its rules, BATS Exchange
will cease trading any equity security
admitted to unlisted trading privileges
that is no longer listed on one of these
exchanges. The Commission finds that
these rules are consistent with the
Act.162
mstockstill on PROD1PC66 with NOTICES
IV. Exemption from Section 19(b) of the
Act With Regard to FINRA Rules
Incorporated by Reference
BATS Exchange proposes to
incorporate by reference certain FINRA
rules as Exchange rules. Thus, for
certain Exchange rules, Exchange
members will comply with an Exchange
rule by complying with the FINRA rule
referenced.163 In connection with its
proposal to incorporate FINRA rules by
reference, BATS Exchange requested,
pursuant to Rule 240.0–12,164 an
exemption under Section 36 of the Act
from the rule filing requirements of
Section 19(b) of the Act for changes to
those BATS Exchange rules that are
effected solely by virtue of a change to
a cross-referenced FINRA rule.165 BATS
Exchange proposes to incorporate by
reference categories of rules (rather than
individual rules within a category) that
are not trading rules. BATS Exchange
agrees to provide written notice to its
members whenever a proposed rule
change to a FINRA rule that is
incorporated by reference is
proposed.166
Using its authority under Section 36
of the Act,167 the Commission
previously exempted certain SROs from
the requirement to file proposed rule
161 Id. BATS Exchange’s rules currently do not
provide for the trading of options, security futures,
or other similar instruments.
162 BATS Exchange has represented to the
Commission that it intends to phase-in the trading
of securities currently trading on the BATS ECN to
BATS Exchange, and that it will provide
appropriate advance notice to its members of the
phase-in schedule. The Commission believes that
this approach is appropriate and should help
maintain an orderly transition to the BATS
Exchange.
163 BATS Exchange proposed to incorporate by
reference the 12000 and 13000 Series of FINRA’s
NASD Manual, the NASD Code of Arbitration
Procedure for Customer and Industry Disputes. See
BATS Exchange Rule 9.1.
164 See 17 CFR 240.0–12.
165 See letter to Nancy Morris, Secretary,
Commission, from J. Craig Long, Foley & Lardner,
dated June 24, 2008.
166 BATS Exchange will provide such notice via
a posting on the same Web site location where
BATS Exchange will post its own rule filings
pursuant to Commission Rule 19b–4(l). The posting
will include a link to the location on the FINRA
Web site where the proposed rule change is posted.
See id.
167 15 U.S.C. 78mm.
VerDate Aug<31>2005
17:48 Aug 20, 2008
Jkt 214001
49507
changes under Section 19(b) of the
Act.168 Each such exempt SRO agreed to
be governed by the incorporated rules,
as amended from time to time, but is not
required to file a separate proposed rule
change with the Commission each time
the SRO whose rules are incorporated
by reference seeks to modify its rules.
In addition, each such exempt SRO
incorporated by reference only
regulatory rules (i.e., margin, suitability,
arbitration), not trading rules, and
incorporated by reference whole
categories of rules (i.e., did not ‘‘cherrypick’’ certain individual rules within a
category). Each such exempt SRO had
reasonable procedures in place to
provide written notice to its members
each time a change is proposed to the
incorporated rules of another SRO in
order to provide its members with
notice of a proposed rule change that
affects their interests, so that they would
have an opportunity to comment on it.
The Commission is granting BATS
Exchange’s request for exemption,
pursuant to Section 36 of the Act, from
the rule filing requirements of Section
19(b) of the Act with respect to the rules
that BATS Exchange proposes to
incorporate by reference. This
exemption is conditioned upon BATS
Exchange providing written notice to its
members whenever FINRA proposes to
change a rule that BATS Exchange has
incorporated by reference. The
Commission believes that this
exemption is appropriate in the public
interest and consistent with the
protection of investors because it will
promote more efficient use of
Commission and SRO resources by
avoiding duplicative rule filings based
on simultaneous changes to identical
rules sought by more than one SRO.
Consequently, the Commission grants
BATS Exchange’s exemption request.
C. Minor Rule Violation Plan. A
MRVP filed by BATS Exchange under
Rule 19d–1(c)(2) must be declared
effective by the Commission.169
D. 17d–2 Agreement. An agreement
pursuant to Rule 17d–2 170 between
FINRA and BATS Exchange that
allocates to FINRA regulatory
responsibility for those matters
specified above 171 must be approved by
the Commission, or BATS Exchange
must demonstrate that it independently
has the ability to fulfill all of its
regulatory obligations.
E. Regulatory Contract. The
Regulatory Contract between BATS
Exchange and FINRA containing those
matters specified above 172 must be
executed and the provisions in the
Regulatory Contract that will specify the
BATS Exchange and Commission rules
for which FINRA will provide certain of
the regulatory functions under the
Regulatory Contract must be finalized,
or BATS Exchange must demonstrate
that it independently has the ability to
fulfill all of its regulatory obligations.
F. Examination by the Commission.
BATS Exchange must have, and
represent in a letter to the staff in the
Commission’s Office of Compliance
Inspections and Examinations that it
has, adequate procedures and programs
in place to effectively regulate BATS
Exchange.
It is further ordered, pursuant to
Section 36 of the Act,173 that BATS
Exchange shall be exempt from the rule
filing requirements of Section 19(b) of
the Act 174 with respect to the FINRA
rules BATS Exchange proposes to
incorporate by reference into BATS
Exchange’s rules, subject to the
conditions specified in this Order.
V. Conclusion
By the Commission (Chairman Cox and
Commissioners Casey, Aguilar, and Paredes);
Commissioner Walter not participating.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–19388 Filed 8–20–08; 8:45 am]
It is ordered that the application of
BATS Exchange for registration as a
national securities exchange be, and
hereby is, granted.
It is further ordered that operation of
BATS Exchange is conditioned on the
satisfaction of the requirements below:
A. Participation in National Market
System Plans. BATS Exchange must join
the CTA Plan, the CQ Plan, the Nasdaq
UTP Plan, and the Order Execution
Quality Disclosure Plan.
B. Intermarket Surveillance Group.
BATS Exchange must join the
Intermarket Surveillance Group.
168 See, e.g., Securities Exchange Act Release No.
49260 (February 17, 2004), 69 FR 8500 (February
24, 2004) and Nasdaq Exchange Registration Order,
supra note 29.
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
BILLING CODE 8010–01–P
169 17
CFR 240.19d–1(c)(2).
CFR 240.17d–2.
171 See supra notes 103 to 110 and accompanying
text.
172 See supra notes 95 to 102 and accompanying
text.
173 15 U.S.C. 78mm.
174 15 U.S.C. 78s(b).
170 17
E:\FR\FM\21AUN1.SGM
21AUN1
]]>Agencies
[Federal Register Volume 73, Number 163 (Thursday, August 21, 2008)]
[Notices]
[Pages 49498-49507]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-19388]
[[Page 49498]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58375; File No. 10-182]
In the Matter of the Application of BATS Exchange, Inc. for
Registration as a National Securities Exchange; Findings, Opinion, and
Order of the Commission
August 18, 2008.
I. Introduction
On November 8, 2007, BATS Exchange, Inc. (``BATS Exchange'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'') a Form 1 application (``Form 1'') under the Securities
Exchange Act of 1934 (``Act''), seeking registration as a national
securities exchange pursuant to Section 6 of the Act.\1\ On February
13, 2008, BATS Exchange submitted Amendment No. 1 to its Form 1. Notice
of the application, as amended, was published for comment in the
Federal Register on February 20, 2008.\2\ The Commission received one
comment letter regarding the BATS Exchange Form 1.\3\ On June 18, 2008,
BATS Exchange filed Amendment No. 2 to its Form 1.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78f.
\2\ See Securities Exchange Act Release No. 57322 (February 13,
2008), 73 FR 9370 (``Notice'').
\3\ The commenter expressed support for the BATS Exchange Form
1. See letter from Brian McPartlin dated February 14, 2008.
\4\ In Amendment No. 2, BATS Exchange modified its application
by: (1) Updating its response to the Form 1 Exhibits to reflect,
among other things, certain personnel changes, the existence of a
new affiliate, BATS Trading Limited, audited financials for BATS
Trading, Inc. (``BATS Trading''), and how BATS Exchange intends to
fulfill its regulatory obligations; (2) adding a provision to the
BATS Exchange Amended and Restated By-Laws that allows the
stockholder of BATS Exchange to appoint the initial Member
Representative Directors to the BATS Exchange Board, and amending
the definition of ``Executive Representative'' of a member of BATS
Exchange; (3) updating certain provisions of the Investors Rights
Agreement; and (4) amending the BATS Holdings Amended and Restated
Certificate of Incorporation to reduce the number of authorized
shares of stock of BATS Holdings, Inc. (``BATS Holdings''). BATS
Exchange also made certain modifications to its proposed rules to:
(1) Change the start of its pre-opening session from 9:00 a.m. to
8:00 a.m.; (2) remove the ability of a person to submit one
membership application with the Financial Industry Regulatory
Authority, Inc. (``FINRA''), when applying for membership in both
FINRA and BATS Exchange; (3) clarify that the requirement for
eligibility for BATS Exchange membership of membership in another
SRO applies for continued membership; (4) clarify that the 90-day
waive-in period will begin on the date that BATS Exchange's
application for registration as a national securities exchange is
approved by the Commission; (5) amend the BATS Only Order type to
provide that a non-displayed order would get a new timestamp when it
becomes displayed; (6) add continuing education requirements for
Authorized Traders that are substantially similar to those of FINRA;
(7) specify certain BATS Exchange rules and recommended fine amounts
for minor rule violations; (8) delete a provision requiring non-
clearing members to implement certain procedures of FINRA's Code of
Practice; (9) amend its rule relating to failures to deliver/receive
to conform to Regulation SHO; and (10) adding a rule to codify the
ability of BATS Exchange to enter into an agreement with another
self-regulatory organization (``SRO'') to provide regulatory
services to BATS Exchange. The changes proposed in Amendment No. 2
either are not material or are otherwise responsive to the concerns
of the Commission.
---------------------------------------------------------------------------
II. Statutory Standards
Under Sections 6(b) and 19(a) of the Act,\5\ the Commission shall
by order grant a registration as a national securities exchange if it
finds that the exchange is so organized and has the capacity to carry
out the purposes of the Act and can comply, and can enforce compliance
by its members and persons associated with its members, with the
provisions of the Act, the rules and regulations thereunder, and the
rules of the exchange.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f(b) and 78s(a).
---------------------------------------------------------------------------
As discussed in greater detail below, the Commission finds that
BATS Exchange's application for exchange registration meets the
requirements of the Act and the rules and regulations thereunder.
Further, the Commission finds that the proposed rules of BATS Exchange
are consistent with Section 6 of the Act in that, among other things,
they are designed to: (1) Assure fair representation of an exchange's
members in the selection of its directors and administration of its
affairs and provide that, among other things, one or more directors
shall be representative of investors and not be associated with the
exchange, or with a broker or dealer; (2) prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, remove impediments to and
perfect the mechanisms of a free and open market and a national market
system; and (3) protect investors and the public interest. The
Commission also believes that the rules of BATS Exchange are consistent
with Section 11A of the Act.\6\ Finally, the Commission finds that the
proposed rules of BATS Exchange do not impose any burden on competition
not necessary or appropriate in furtherance of the purposes of the
Act.\7\
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78k-1.
\7\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
III. Discussion
A. Corporate Structure
BATS Exchange has applied to the Commission to register as a
national securities exchange. BATS Holdings, a Delaware corporation,
will wholly own BATS Exchange and BATS Trading. Currently, BATS
Trading, a registered broker-dealer, operates the BATS ECN. Before
operation of BATS Exchange as a national securities exchange, BATS
Trading will transfer most of its assets to BATS Exchange. BATS Trading
will continue as a broker-dealer with the sole function of providing
outbound order routing services to BATS Exchange.\8\
---------------------------------------------------------------------------
\8\ See BATS Exchange Rule 2.11. See also infra note 151 and
accompanying text.
---------------------------------------------------------------------------
1. Self-Regulatory Function of BATS Exchange; Relationship Between BATS
Holdings, Inc. and BATS Exchange; Jurisdiction Over BATS Holdings, Inc.
Although BATS Holdings will not itself carry out regulatory
functions, its activities with respect to the operation of BATS
Exchange must be consistent with, and not interfere with, the
Exchange's self-regulatory obligations. The proposed BATS Holdings
corporate documents include certain provisions that are designed to
maintain the independence of the Exchange's self-regulatory function
from BATS Holdings, enable the Exchange to operate in a manner that
complies with the federal securities laws, including the objectives of
Sections 6(b) and 19(g) of the Act, and facilitate the ability of the
Exchange and the Commission to fulfill their regulatory and oversight
obligations under the Act.\9\
---------------------------------------------------------------------------
\9\ See BATS Holdings Amended and Restated By-Laws Article XII
and Article XIV, Sections 14.01, 14.02, 14.03, 14.04, 14.05, and
14.06.
---------------------------------------------------------------------------
For example, BATS Holdings submits to the Commission's jurisdiction
with respect to activities relating to BATS Exchange,\10\ and agrees to
provide the Commission and BATS Exchange with access to its books and
records that are related to the operation or administration of BATS
Exchange.\11\ In addition, to the extent they are related to the
operation or administration of BATS Exchange, the books, records,
premises, officers, directors, agents, and employees of BATS Holdings
shall be deemed the books, records, premises, officers, directors,
agents, and employees of BATS Exchange for purposes of, and subject to
oversight pursuant to, the Act.\12\ BATS Holdings
[[Page 49499]]
also agrees to keep confidential non-public information relating to the
self-regulatory function \13\ of BATS Exchange and not to use such
information for any non-regulatory purpose.\14\ In addition, the board
of directors of BATS Holdings, as well as its officers, employees, and
agents, are required to give due regard to the preservation of the
independence of the Exchange's self-regulatory function.\15\ Further,
BATS Holdings By-Laws require that any changes to the BATS Holdings
Certificate of Incorporation and By-Laws be submitted to the Board of
Directors of the Exchange (``Exchange Board''), and, if such amendment
is required to be filed with the Commission pursuant to Section 19(b)
of the Act, such change shall not be effective until filed with, or
filed with and approved by, the Commission.\16\ The Commission finds
that these provisions are consistent with the Act, and that they will
assist the Exchange in fulfilling its self-regulatory obligations and
in administering and complying with the requirements of the Act.
---------------------------------------------------------------------------
\10\ See BATS Holdings Amended and Restated By-Laws Article XIV,
Section 14.05.
\11\ See BATS Holdings Amended and Restated By-Laws Article XIV,
Section 14.03.
\12\ Id.
\13\ This requirement to keep confidential non-public
information relating to the self-regulatory function shall not limit
the Commission's ability to access and examine such information or
limit the ability of directors, officers, or employees of BATS
Holdings to disclose such information to the Commission. See BATS
Holdings Amended and Restated By-Laws Article XIV, Section 14.02.
\14\ See BATS Holdings Amended and Restated By-Laws Article XIV,
Section 14.02.
\15\ See BATS Holdings Amended and Restated By-Laws Article XIV,
Section 14.01.
\16\ See BATS Holdings Amended and Restated Certificate of
Incorporation TWELFTH and BATS Holdings Amended and Restated By-Laws
Article XII.
---------------------------------------------------------------------------
The Commission also believes that under Section 20(a) of the Act
\17\ any person with a controlling interest in BATS Exchange would be
jointly and severally liable with and to the same extent that BATS
Exchange is liable under any provision of the Act, unless the
controlling person acted in good faith and did not directly or
indirectly induce the act or acts constituting the violation or cause
of action. In addition, Section 20(e) of the Act \18\ creates aiding
and abetting liability for any person who knowingly provides
substantial assistance to another person in violation of any provision
of the Act or rule thereunder. Further, Section 21C of the Act \19\
authorizes the Commission to enter a cease-and-desist order against any
person who has been ``a cause of'' a violation of any provision of the
Act through an act or omission that the person knew or should have
known would contribute to the violation. These provisions are
applicable to BATS Holdings' dealings with BATS Exchange.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78t(a).
\18\ 15 U.S.C. 78t(e).
\19\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------
2. Ownership and Voting Limitations; Changes in Control of BATS
Exchange
The BATS Holdings proposed Amended and Restated Certificate of
Incorporation includes restrictions on the ability to own and vote
shares of capital stock of BATS Holdings.\20\ These limitations are
designed to prevent any shareholder from exercising undue control over
the operation of BATS Exchange and to assure that the Exchange and the
Commission are able to carry out their regulatory obligations under the
Act.
---------------------------------------------------------------------------
\20\ These provisions are generally consistent with ownership
and voting limits approved by the Commission for other SROs. See
e.g., Securities Exchange Act Release Nos. 53963 (June 8, 2006), 71
FR 34660 (June 15, 2006) (SR-NSX-2006-03) (``NSX Demutualization
Order''); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005)
(SR-CHX-2004-26) (``CHX Demutualization Order''); and 49098 (January
16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73) (``Phlx
Demutualization Order'').
---------------------------------------------------------------------------
Generally, no person, either alone or together with its related
persons,\21\ may beneficially own more than forty percent of any class
of capital stock of BATS Holdings.\22\ The BATS Holdings proposed
Amended and Restated Certificate of Incorporation prohibits BATS
Exchange members, either alone or together with their related persons,
from beneficially owning more than twenty percent of shares of any
class of capital stock of BATS Holdings.\23\ If any stockholder
violates these ownership limits, BATS Holdings will redeem the shares
in excess of the applicable ownership limit for their fair market
value.\24\ In addition, no person, alone or together with its related
persons, may vote or cause the voting of more than twenty percent of
the voting power of the then issued and outstanding capital stock of
BATS Holdings.\25\ If any stockholder purports to vote, or cause the
voting of, shares that would violate this voting limit, BATS Holdings
will not honor such vote in excess of the voting limit.\26\
---------------------------------------------------------------------------
\21\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (a)(ii).
\22\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (b)(i)(A).
\23\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (b)(i)(B).
\24\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (e).
\25\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (b)(i)(C).
\26\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (d).
---------------------------------------------------------------------------
The BATS Holdings Board may waive the forty percent ownership
limitation applicable to non-BATS Exchange member stockholders and the
twenty percent voting limitation, pursuant to a resolution duly adopted
by the Board of Directors, if it makes certain findings. Any such
waiver would not be effective until approved by the Commission pursuant
to Section 19 of the Act.\27\ However, as long as BATS Holdings
directly or indirectly controls BATS Exchange, the BATS Holdings Board
cannot waive the voting and ownership limits above twenty percent for
BATS Exchange members and their related persons.\28\
---------------------------------------------------------------------------
\27\ See BATS Holdings Amended and Restated Certificate of
Incorporation FIFTH (b)(ii)(B).
\28\ These provisions are generally consistent with waiver of
ownership and voting limits approved by the Commission for other
SROs. See e.g., NSX Demutualization Order, supra note 20; CHX
Demutualization Order, supra note 20; and Securities Exchange Act
Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (SR-
PCX-2004-08).
---------------------------------------------------------------------------
Members that trade on an exchange traditionally have ownership
interests in such exchange. As the Commission has noted in the past,
however, a member's interest in an exchange could become so large as to
cast doubt on whether the exchange can fairly and objectively exercise
its self-regulatory responsibilities with respect to that member.\29\ A
member that is a controlling shareholder of an exchange might be
tempted to exercise that controlling influence by directing the
exchange to refrain from, or the exchange may hesitate to, diligently
monitor and surveil the member's conduct or diligently enforce its
rules and the federal securities laws with respect to conduct by the
member that violates such provisions.
---------------------------------------------------------------------------
\29\ See, e.g., Securities Exchange Act Release Nos. 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(``Nasdaq Exchange Registration Order'') and 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (``NYSE/
Archipelago Merger Approval Order'').
---------------------------------------------------------------------------
In addition, as proposed, BATS Exchange will be a wholly-owned
subsidiary of BATS Holdings. The BATS Exchange Amended and Restated By-
Laws identifies this ownership structure.\30\ Any changes to the BATS
Exchange Amended and Restated By-Laws, including any change in the
provision that identifies BATS Holdings as the sole owner, must be
filed with and approved by the Commission pursuant to Section 19 of the
Act.\31\ Further, pursuant to the BATS Exchange Amended and Restated
By-Laws, BATS Holdings may not transfer or assign, in whole or in part,
its ownership interest in BATS Exchange.\32\
---------------------------------------------------------------------------
\30\ See BATS Exchange Amended and Restated By-Laws Article
I(cc).
\31\ See 15 U.S.C. 78s.
\32\ See BATS Exchange Amended and Restated By-Laws Article IV,
Section 7.
---------------------------------------------------------------------------
[[Page 49500]]
The Commission believes that these provisions are consistent with
the Act. These requirements should minimize the potential that a person
could improperly interfere with or restrict the ability of the
Commission or the Exchange to effectively carry out their regulatory
oversight responsibilities under the Act.
3. BATS Exchange
BATS Exchange has applied to the Commission to register as a
national securities exchange. As part of its exchange application, the
Exchange has filed the BATS Exchange Certificate of Incorporation and
the proposed Amended and Restated By-Laws of BATS Exchange. In these
documents, among other things, BATS Exchange establishes the
composition of the Exchange Board and the BATS Exchange committees.
a. The BATS Exchange Board of Directors
The Exchange Board will be the governing body of BATS Exchange and
possess all of the powers necessary for the management of the business
and affairs of the Exchange and the execution of its responsibilities
as an SRO. Under the BATS Exchange Amended and Restated By-Laws:
The Exchange Board will be composed of ten directors; \33\
---------------------------------------------------------------------------
\33\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 2(a).
---------------------------------------------------------------------------
One director will be the Chief Executive Officer of BATS
Exchange; \34\
---------------------------------------------------------------------------
\34\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 2(b).
---------------------------------------------------------------------------
The number of Non-Industry Directors,\35\ including at
least one Independent Director,\36\ will equal or exceed the sum of the
number of Industry Directors \37\ and Member Representative Directors;
\38\ and
---------------------------------------------------------------------------
\35\ ``Non-Industry Director'' means a Director who is an
Independent Director or any other individual who would not be an
Industry Director. See BATS Exchange Amended and Restated By-Laws
Article I(v).
\36\ ``Independent Director'' means a ``Director who has no
material relationship with the [Exchange], or any Exchange Member or
any affiliate of any such Exchange Member; provided, however, that
an individual who otherwise qualifies as an Independent Director
shall not be disqualified from serving in such capacity solely
because such Director is a Director of the [Exchange] or its
stockholder.'' See BATS Exchange Amended and Restated By-Laws
Article I(m).
\37\ Generally, an ``Industry Director'' is, among other things,
a Director that is or has been within the past three years an
officer, director, employee, or owner of a broker-dealer. In
addition, persons who have a consulting or employment relationship
with the Exchange and its affiliates, are considered ``Industry.''
See BATS Exchange Amended and Restated By-Laws Article I(o).
\38\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 2(b)(i).
---------------------------------------------------------------------------
At least twenty percent of the directors on the Exchange
Board will be Member Representative Directors.\39\
---------------------------------------------------------------------------
\39\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 2(b)(ii). ``Member Representative Director'' means a
``Director who has been elected by stockholders after having been
nominated by the Member Nominating Committee or by an Exchange
Member pursuant to these By-Laws and confirmed as the nominee of
Exchange Members after majority vote of Exchange Members, if
applicable. A Member Representative Director must be an officer,
director, employee, or agent of an Exchange member that is not a
Stockholder Exchange Member.'' See BATS Exchange Amended and
Restated By-Laws Article I(s). See also BATS Exchange Amended and
Restated By-Laws Article III, Section 4(b).
---------------------------------------------------------------------------
BATS Holdings will appoint the initial Exchange Board, including
the Member Representative Directors, which shall serve until the first
annual meeting of stockholders.\40\ The first annual meeting of the
stockholders will be held prior to BATS Exchange commencing operations
as a national securities exchange.\41\ At the first annual meeting of
stockholders, a new Exchange Board will be elected pursuant to the BATS
Exchange Amended and Restated By-Laws. Therefore, prior to commencing
operations as a national securities exchange, BATS Exchange Members
will have the opportunity to participate in the selection of Member
Representative Directors, and the Exchange Board will be in compliance
with the compositional requirements contained in the BATS Exchange
Amended and Restated By-Laws.\42\
---------------------------------------------------------------------------
\40\ See BATS Exchange Amended and Restated By-Laws Article I(s)
and Article III, Section 4(g); see also Amendment No. 2.
\41\ See BATS Exchange Amended and Restated By-Laws Article IV,
Section 1(b).
\42\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 2.
---------------------------------------------------------------------------
BATS Holdings will appoint the initial Nominating Committee \43\
and Member Nominating Committee,\44\ consistent with each committee's
compositional requirements,\45\ to nominate candidates for election to
the Exchange Board. Each of the Nominating Committee and Member
Nominating Committee, after completion of its respective duties for
nominating directors for election to the Board for that year, shall
nominate candidates to serve on the succeeding year's Nominating
Committee or Member Nominating Committee, as applicable. Additional
candidates for the Member Nominating Committee may be nominated and
elected by BATS Exchange Members pursuant to a petition process.\46\
---------------------------------------------------------------------------
\43\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 2. The Nominating Committee will be comprised of at least
three directors, and the number of Non-Industry members on the
Nominating Committee must equal or exceed the number of Industry
members.
\44\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 3. The Member Nominating Committee will be comprised of at
least three directors, and each member of the Member Nominating
Committee shall be a Member Representative member.
\45\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 1.
\46\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 1.
---------------------------------------------------------------------------
The Nominating Committee will nominate candidates for each director
position other than the Member Representative Directors, and BATS
Holdings, as the sole shareholder, will elect those directors. The
Member Nominating Committee will nominate candidates for each Member
Representative Director position on the Exchange Board.\47\ Additional
candidates may be nominated for the Member Representative Director
positions by BATS Exchange Members pursuant to a petition process.\48\
If no candidates are nominated pursuant to a petition process, then the
initial nominees of the Member Nominating Committee will be nominated
as Member Representative Directors by the Nominating Committee. If a
petition process produces additional candidates, then the candidates
nominated pursuant to a petition process, together with those nominated
by the Member Nominating Committee, will be presented to BATS Exchange
Members for election to determine the final nomination of Member
Representative Directors.\49\ The candidates who receive the most votes
will be nominated as Member Representative Directors by the Nominating
Committee.\50\ BATS Holdings, as the sole shareholder, will elect those
candidates nominated by the Nominating Committee as Member
Representative Directors.\51\
---------------------------------------------------------------------------
\47\ The Member Nominating Committee will solicit comments from
BATS Exchange Members for the purpose of approving and submitting
names of candidates for election to the position of Member
Representative Director. See BATS Exchange Amended and Restated By-
Laws Article III, Section 4(b).
\48\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 4(c). The petition must be signed by Executive
Representatives of ten percent or more of the Exchange members. No
Exchange member, together with its affiliates, may account for more
than fifty percent of the signatures endorsing a particular
candidate. Id.
\49\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 4(e) and (f). Each BATS Exchange Member shall have the right
to cast one vote for each available Member Representative Director
nomination, provided that any such vote must be cast for a person on
the List of Candidates and that no BATS Exchange Member, together
with its affiliates, may account for more than twenty percent of the
votes cast for a candidate. Id.
\50\ See BATS Exchange Amended and Restated By-Laws Article III,
Section 4(f).
\51\ Id.
---------------------------------------------------------------------------
[[Page 49501]]
The Commission believes that the requirement in the BATS Exchange
Amended and Restated By-Laws that twenty percent of the directors be
Member Representative Directors and the means by which they are chosen
by members provides for the fair representation of members in the
selection of directors and the administration of BATS Exchange
consistent with the requirement in Section 6(b)(3) of the Act.\52\ As
the Commission has previously noted, this requirement helps to ensure
that members have a voice in the use of self-regulatory authority, and
that an exchange is administered in a way that is equitable to all
those who trade on its market or through its facilities.\53\
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78f(b)(3).
\53\ See Nasdaq Exchange Registration Order and NYSE/Archipelago
Merger Approval Order, supra note 29.
---------------------------------------------------------------------------
The Commission has previously stated its belief that the inclusion
of public, non-industry representatives on exchange oversight bodies is
critical to an exchange's ability to protect the public interest.\54\
Further, public, non-industry representatives help to ensure that no
single group of market participants has the ability to systematically
disadvantage other market participants through the exchange governance
process. The Commission believes that public directors can provide
unique, unbiased perspectives, which should enhance the ability of the
Exchange Board to address issues in a non-discriminatory fashion and
foster the integrity of BATS Exchange.\55\ The Commission believes that
the Exchange Board satisfies the requirements in Section 6(b)(3) of the
Act,\56\ which requires that one or more directors be representative of
issuers and investors and not be associated with a member of the
exchange, or with a broker or dealer.\57\
---------------------------------------------------------------------------
\54\ See, e.g., Regulation of Exchanges and Alternative Trading
Systems, Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
\55\ See Nasdaq Exchange Registration Order and NYSE/Archipelago
Merger Approval Order, supra note 29.
\56\ 15 U.S.C. 78f(b)(3).
\57\ The number of Non-Industry Directors on the Exchange Board
must equal or exceed the sum of the Industry and Member
Representative Directors, and the Exchange Board must include at
least one Independent Director. See BATS Exchange Amended and
Restated By-Laws Article III, Section 2(b)(i).
---------------------------------------------------------------------------
b. BATS Exchange Committees
In the BATS Exchange Amended and Restated By-Laws, BATS Exchange
has proposed to establish several committees. Specifically, BATS
Exchange has proposed to establish the following committees that would
be appointed by the Chairman of the Exchange Board, with the approval
of the Exchange Board: A Compensation Committee; \58\ Audit Committee;
\59\ Regulatory Oversight Committee; \60\ Appeals Committee; \61\
Executive Committee; \62\ and Finance Committee.\63\ In addition, BATS
Exchange has proposed to establish a Nominating Committee \64\ and a
Member Nominating Committee, which would be elected on an annual basis
by vote of stockholders.\65\ For the reasons discussed above, the
Commission believes that BATS Exchange's proposed committees should
enable BATS Exchange to carry out its responsibilities under the Act
and are consistent with the Act.
---------------------------------------------------------------------------
\58\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(a). The Compensation Committee will be comprised of at
least three people, and each voting member of the Compensation
Committee shall be a Non-Industry Director. Id.
\59\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(b). The Audit Committee will be comprised of at least
three people, and a majority of the Audit Committee members shall be
Non-Industry Directors and a Non-Industry Director shall serve as
Chairman of the Audit Committee. Id.
\60\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(c). The Regulatory Oversight Committee will be comprised
of at least three people, and each member of the Regulatory
Oversight Committee shall be a Non-Industry Director. Id.
\61\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(d). The Appeals Committee shall consist of one Independent
Director, one Industry Director, and one Member Representative
Director. Id.
\62\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(e). The number of Non-Industry Directors on the Executive
Committee shall equal or exceed the number of Industry Directors.
The percentage of Independent Directors on the Executive Committee
shall be at least as great as the percentage of Independent
Directors on the whole Exchange Board, and the percentage of Member
Representative Directors on the Executive Committee shall be at
least as great as the percentage of Member Representative Directors
on the whole Exchange Board. Id.
\63\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(f).
\64\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 2, and supra note 43.
\65\ See BATS Exchange Amended and Restated By-Laws Article VI,
Section 1, and supra note 44. Additional candidates for the Member
Nominating Committee may be nominated and elected by BATS Exchange
members pursuant to a petition process. See supra note 48 and
accompanying text.
---------------------------------------------------------------------------
B. Regulation of BATS Exchange
As a prerequisite for the Commission's approval of an exchange's
application for registration, an exchange must be organized and have
the capacity to carry out the purposes of the Act.\66\ Specifically, an
exchange must be able to enforce compliance by its members, and persons
associated with its members, with the federal securities laws and the
rules of the exchange.\67\
---------------------------------------------------------------------------
\66\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
\67\ Id. See also Section 19(g) of the Act, 15 U.S.C. 78s(g).
---------------------------------------------------------------------------
1. Membership
Membership on BATS Exchange will be open to any registered broker
or dealer that is a member of another registered national securities
exchange or association, or any natural person associated with such a
registered broker or dealer.\68\ To remain eligible for membership in
BATS Exchange, a BATS Exchange member must be a member of another SRO
at all times.\69\
---------------------------------------------------------------------------
\68\ See BATS Exchange Rules 2.3 and 2.5(a)(4) and Amendment No.
2.
\69\ Id.
---------------------------------------------------------------------------
For a temporary 90-day period after approval of BATS Exchange's
application, an applicant that is an active member of another SRO and
is a current or former subscriber to the BATS ECN will be able to apply
through an expedited process to become a BATS Exchange member, and to
register with BATS Exchange all of its associated persons whose
registrations are active at the time BATS Exchange is approved as a
national securities exchange, by submitting a waive-in application
form, including membership agreements.\70\ BATS Exchange may request
additional documentation in addition to the waive-in application form
in order to determine that a waive-in applicant meets BATS Exchange's
qualification standards.\71\ All of the firm's associated persons who
are registered in categories recognized by BATS Exchange rules would
become registered persons of a BATS Exchange member firm.\72\
All other applicants (and after the 90-day period has ended, those
that could have waived in through the expedited process) may apply for
membership in BATS Exchange by submitting a full membership application
to BATS Exchange.\73\ Applications for association with an Exchange
Member shall be submitted to the Exchange on Form U-4 and such other
forms as BATS Exchange may prescribe.
---------------------------------------------------------------------------
\70\ See BATS Exchange Rule 2.4.
\71\ Id.
\72\ Id.
\73\ See BATS Exchange Rule 2.6 and Amendment No. 2.
---------------------------------------------------------------------------
BATS Exchange will receive and review all applications for
membership in the Exchange. If the Exchange is satisfied that the
applicant is qualified for membership, the Exchange will promptly
notify the applicant, in writing, of such determination, and the
applicant shall be a member of the
[[Page 49502]]
Exchange.\74\ If the Exchange is not satisfied that the applicant is
qualified for membership, the Exchange shall promptly notify the
applicant of the grounds for denial.\75\ Once an applicant is a member
of the Exchange, it must continue to possess all the qualifications set
forth in the BATS Exchange rules. When the Exchange has reason to
believe that an Exchange member or associated person of a member fails
to meet such qualifications, the Exchange may suspend or revoke such
person's membership or association.\76\
---------------------------------------------------------------------------
\74\ See BATS Exchange Rule 2.6(c).
\75\ See BATS Exchange Rule 2.6(d).
\76\ See BATS Exchange Rule 2.7; see also BATS Exchange Rules
Chapters VII and VIII.
---------------------------------------------------------------------------
Appeal of a staff denial, suspension, or termination of membership
will be heard by the Appeals Committee.\77\ Decisions of the Appeals
Committee will be made in writing and will be sent to the parties to
the proceeding. The decisions of the Appeals Committee will be subject
to review by the Exchange Board, on its own motion, or upon written
request by the aggrieved party or by the Chief Regulatory Officer
(``CRO''). The Exchange Board will have sole discretion to grant or
deny the request. The Exchange Board will conduct the review of the
Appeals Committee's decision. The Exchange Board may affirm, reverse,
or modify the Appeals Committee's decision. The Exchange Board's
decision is final.\78\
---------------------------------------------------------------------------
\77\ See BATS Exchange Rule 10.3; see also BATS Exchange Amended
and Restated By-Laws Article V, Section 6(d).
\78\ See BATS Exchange Rule 10.5(b). Membership decisions are
subject to review by the Commission. See BATS Exchange Rule 10.7.
---------------------------------------------------------------------------
The Commission finds that the BATS Exchange's membership rules are
consistent with Section 6 of the Act,\79\ specifically Section 6(b)(2)
of the Act,\80\ which requires that a national securities exchange have
rules that provide that any registered broker or dealer or natural
person associated with such broker or dealer may become a member and
any person may become associated with an exchange member. The
Commission notes that pursuant to Section 6(c) of the Act, an exchange
must deny membership to any person, other than a natural person, that
is not a registered broker or dealer, any natural person that is not,
or is not associated with, a registered broker or dealer, and
registered broker-dealers that do not satisfy certain standards, such
as financial responsibility or operational capacity. As a registered
exchange, BATS Exchange must independently determine if an applicant
satisfies the standards set forth in the Act, regardless of whether an
applicant is a member of another SRO.\81\
---------------------------------------------------------------------------
\79\ 15 U.S.C. 78f.
\80\ 5 U.S.C. 78f(b)(2).
\81\ See Nasdaq Exchange Registration Order, supra note 29.
---------------------------------------------------------------------------
2. Regulatory Independence
BATS Exchange has proposed several measures to help ensure the
independence of its regulatory function from its market operations and
other commercial interests. The regulatory operations of BATS Exchange
will be supervised by the CRO and monitored by the Regulatory Oversight
Committee. The Regulatory Oversight Committee will consist of three
members, each of whom must be a Non-Industry Director.\82\ The
Regulatory Oversight Committee will be responsible for monitoring the
adequacy and effectiveness of the Exchange's regulatory program,
assessing the Exchange's regulatory performance, and assisting the
Exchange Board in reviewing the Exchange's regulatory plan and the
overall effectiveness of the Exchange's regulatory functions.\83\ The
Regulatory Oversight Committee also will meet with the CRO in executive
session at regularly scheduled meetings and at any time upon request of
the CRO or any member of the Regulatory Oversight Committee.\84\
---------------------------------------------------------------------------
\82\ See BATS Exchange Amended and Restated By-Laws Articles
I(v) and V, Section 6(c).
\83\ See BATS Exchange Amended and Restated By-Laws Article V,
Section 6(c).
\84\ See BATS Exchange Amended and Restated By-Laws Article VII,
Section 9.
---------------------------------------------------------------------------
BATS Exchange proposes that its CRO have general supervision of the
regulatory operations of the Exchange, including overseeing
surveillance, examination, and enforcement functions.\85\ The CRO also
will administer any regulatory services agreement with another SRO to
which BATS Exchange is a party.\86\ The CRO will be an Executive Vice
President or Senior Vice President that reports directly to the Chief
Executive Officer.\87\ The CRO also may serve as BATS Exchange's
General Counsel.\88\ In addition, any revenues received by BATS
Exchange from fees derived from its regulatory function or regulatory
penalties will not be used for non-regulatory purposes.\89\
---------------------------------------------------------------------------
\85\ Id.
\86\ Id.
\87\ Id.
\88\ Id. See Nasdaq Exchange Registration Order, supra note 29.
\89\ See BATS Exchange Amended and Restated By-Laws Article X,
Section 4.
---------------------------------------------------------------------------
The Commission is concerned about the potential for unfair
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interests that could exist if
an exchange were to otherwise become affiliated with one of its
members, as well as the potential for unfair competitive advantage that
the affiliated member could have by virtue of informational or
operational advantages, or the ability to receive preferential
treatment.\90\ BATS Exchange Rule 2.10 provides that without the prior
approval of the Commission, BATS Exchange or any entity with which it
is affiliated shall not, directly or indirectly, acquire or maintain an
ownership interest in a BATS Exchange member, and a BATS Exchange
member shall not be or become an affiliate of BATS Exchange, or an
affiliate of any affiliate of the Exchange.\91\ BATS Exchange also has
proposed for Commission approval BATS Exchange Rule 2.11, which
provides that BATS Trading, a registered broker-dealer, will provide an
Outbound Router function as a facility of the Exchange pursuant to
certain conditions and limitations.\92\ BATS Trading is an affiliate of
BATS Exchange and will become a member of BATS Exchange. This
affiliation would not be consistent with proposed Rule 2.10 absent
prior Commission approval. As part of the approval today of BATS
Exchange's application for registration as a national securities
exchange, the Commission is approving BATS Exchange Rule 2.11.
---------------------------------------------------------------------------
\90\ See, e.g., Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251 (March 6, 2006).
\91\ See BATS Exchange Rule 2.10.
\92\ See infra Section III.E.
---------------------------------------------------------------------------
The Commission believes that the Exchange's proposal is consistent
with the Act, particularly with Section 6(b)(1), which requires an
exchange to be so organized and have the capacity to carry out the
purposes of the Act.\93\ Although the Commission continues to be
concerned about potential unfair competition and conflict of interest
between an exchange's self-regulatory obligations and its commercial
interests when an exchange is affiliated with one of its members, the
Commission believes that it is consistent with the Act to permit BATS
Trading to become an affiliate of BATS Exchange for the limited
Outbound Router function, in light of the protections afforded by the
conditions and limitations imposed in BATS Exchange's rules.\94\
---------------------------------------------------------------------------
\93\ See 15 U.S.C. 78f(b)(1).
\94\ See infra Section III.E. The Commission has approved
similar arrangements for other SROs. See, e.g., Securities Exchange
Act Release Nos. 57478 (March 12, 2008), 73 FR 14521 (March 18,
2008) (SR-NASDAQ-2007-004) (``NOM Approval Order'') and 54391
(August 31, 2006), 71 FR 52836 (September 7, 2006) (SR-NSX-2006-08)
(``NSX Blade Approval Order'').
---------------------------------------------------------------------------
[[Page 49503]]
3. Regulatory Contract
Although BATS Exchange will be an SRO with all of the attendant
regulatory obligations under the Act, it has entered into a regulatory
contract with FINRA (``Regulatory Contract''), under which FINRA will
perform certain regulatory functions on BATS Exchange's behalf.\95\
Specifically, BATS Exchange represents that FINRA will assist Exchange
staff on registration issues on an as-needed basis, investigate
potential violations of BATS Exchange's rules or federal securities
laws related to activity on the Exchange, conduct examinations related
to market conduct on the Exchange by Members, assist the Exchange with
disciplinary proceedings pursuant to BATS Exchange's Rules, including
issuing charges and conducting hearings, and provide dispute resolution
services to BATS Exchange Members on behalf of the Exchange, including
operation of the Exchange's arbitration program. BATS Exchange
represents that FINRA also will provide the Exchange with access to
FINRA's WebCRD system, and will assist with programming BATS-specific
functionality relating to such system.\96\ Notwithstanding the
Regulatory Contract, BATS Exchange will retain ultimate legal
responsibility for the regulation of its members and its market.
---------------------------------------------------------------------------
\95\ See BATS Exchange Rule 13.7; see also Amendment No. 2.
Pursuant to the applicable provisions of the Freedom of Information
Act, 5 U.S.C. 552, and Commission regulations thereunder, 17 CFR
200.83, BATS Exchange has requested confidential treatment for the
Regulatory Contract.
\96\ See Amendment No. 2.
---------------------------------------------------------------------------
The Commission believes that it is consistent with the Act to allow
BATS Exchange to contract with FINRA to perform examination,
enforcement, and disciplinary functions.\97\ These functions are
fundamental elements to a regulatory program, and constitute core self-
regulatory functions. It is essential to the public interest and the
protection of investors that these functions are carried out in an
exemplary manner, and the Commission believes that FINRA has the
expertise and experience to perform these functions on behalf of BATS
Exchange.\98\
---------------------------------------------------------------------------
\97\ See, e.g., Regulation ATS Release, supra note 54. See also
Securities Exchange Act Release 50122 (July 29, 2004), 69 FR 47962
(August 6, 2004) (SR-Amex-2004-32) (order approving rule that
allowed Amex to contract with another SRO for regulatory services)
(``Amex Regulatory Services Approval Order''); NOM Approval Order,
supra note 94; and Nasdaq Exchange Registration Order, supra note
29.
\98\ See Amex Regulatory Services Approval Order, supra note 97;
NOM Approval Order, supra note 94; and Nasdaq Exchange Registration
Order, supra note 29. The Commission notes that the Regulatory
Contract is not before the Commission and, therefore, the Commission
is not acting on it.
---------------------------------------------------------------------------
At the same time, BATS Exchange, unless relieved by the Commission
of its responsibility,\99\ bears the responsibility for self-regulatory
conduct and primary liability for self-regulatory failures, not the SRO
retained to perform regulatory functions on the Exchange's behalf. In
performing these regulatory functions, however, FINRA may nonetheless
bear liability for causing or aiding and abetting the failure of BATS
Exchange to perform its regulatory functions.\100\ Accordingly,
although FINRA will not act on its own behalf under its SRO
responsibilities in carrying out these regulatory services for BATS
Exchange, FINRA may have secondary liability if, for example, the
Commission finds that the contracted functions are being performed so
inadequately as to cause a violation of the federal securities laws by
BATS Exchange.\101\
---------------------------------------------------------------------------
\99\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder,
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. See also infra notes 103-
110 and accompanying text.
\100\ For example, if failings by FINRA have the effect of
leaving BATS Exchange in violation of any aspect of BATS Exchange's
self-regulatory obligations, BATS Exchange would bear direct
liability for the violation, while FINRA may bear liability for
causing or aiding and abetting the violation. See Nasdaq Exchange
Registration Order, supra note 29 and Securities Exchange Act
Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000)
(File No. 10-127) (order approving the International Securities
Exchange LLC's application for registration as a national securities
exchange).
\101\ Id.
---------------------------------------------------------------------------
Although BATS Exchange has entered into the Regulatory Contact, the
provisions in the Regulatory Contract that will specify the particular
BATS Exchange and Commission rules for which FINRA will provide certain
regulatory functions have not been finalized. Accordingly, the
Commission is conditioning the operation of BATS Exchange on the
execution of the Regulatory Contract and finalization of the provisions
in the Regulatory Contract that will specify the BATS Exchange and
Commission rules for which FINRA will provide regulatory
functions.\102\
---------------------------------------------------------------------------
\102\ Alternatively, BATS Exchange could demonstrate that it has
the ability to fulfill its regulatory obligations.
---------------------------------------------------------------------------
4. 17d-2 Agreement
Section 19(g)(1) of the Act \103\ requires every SRO to examine its
members and persons associated with its members and to enforce
compliance with the federal securities laws and the SRO's own rules,
unless the SRO is relieved of this responsibility pursuant to Section
17(d) of the Act.\104\ Section 17(d) was intended, in part, to
eliminate unnecessary multiple examinations and regulatory duplication
with respect to members of more than one SRO (``common members'').\105\
Rule 17d-2 of the Act permits SROs to propose joint plans allocating
regulatory responsibilities concerning common members.\106\ These
agreements, which must be filed with and approved by the Commission,
generally cover such regulatory functions as personnel registration,
branch office examinations, and sales practices. Commission approval of
a 17d-2 plan relieves the specified SRO of those regulatory
responsibilities allocated by the plan to another SRO.\107\ Many
existing SROs have entered in to such agreements.\108\
---------------------------------------------------------------------------
\103\ 15 U.S.C. 78s(g)(1).
\104\ 15 U.S.C. 78q(d).
\105\ See Securities Exchange Act Release No. 12935 (October 28,
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting
Release'').
\106\ 17 CFR 240.17d-2.
\107\ See Rule 17d-2 Adopting Release, supra note 105.
\108\ See, e.g., Securities Exchange Act Release Nos. 13326
(March 3, 1977), 42 FR 13878 (March 14, 1977) (NYSE/Amex); 13536
(May 12, 1977), 42 FR 26264 (May 23, 1977) (NYSE/BSE); 14152
(November 9, 1977), 42 FR 59339 (November 16, 1977) (NYSE/CSE);
13535 (May 12, 1977), 42 FR 26269 (May 23, 1977) (NYSE/CHX); 13531
(May 12, 1977), 42 FR 26273 (May 23, 1977) (NYSE/PSE); 14093
(October 25, 1977), 42 FR 57199 (November 1, 1977) (NYSE/Phlx);
15191 (September 26, 1978), 43 FR 46093 (October 5, 1978) (NASD/BSE,
CSE, CHX and PSE); 16858 (May 30, 1980), 45 FR 37927 (June 5, 1980)
(NASD/BSE, CSE, CHX and PSE); 42815 (May 23, 2000), 65 FR 34762 (May
31, 2000) (NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July
18, 2006) (NASD/Nasdaq).
---------------------------------------------------------------------------
BATS Exchange has represented to the Commission that BATS Exchange
and FINRA intend to file a 17d-2 agreement with the Commission covering
common members of BATS Exchange and FINRA. This agreement would
allocate to FINRA regulatory responsibility, with respect to common
members, for the following:
FINRA will examine common members of BATS Exchange and
FINRA for compliance with federal securities laws, rules and
regulations, and rules of BATS Exchange that have been certified by
BATS Exchange as identical or substantially similar to FINRA rules.
FINRA will investigate common members of BATS Exchange and
FINRA for violations of federal securities laws, rules or regulations,
or BATS Exchange rules that has been certified by BATS Exchange as
identical or substantially identical to a FINRA rule.
FINRA will enforce compliance by common members with
federal securities laws, rules and regulations, and rules of BATS
Exchange that have been certified by BATS Exchange as
[[Page 49504]]
identical or substantially similar to FINRA rules.
Because BATS Exchange anticipates entering into this 17d-2
agreement, it has not made provision to fulfill the regulatory
obligations that would be undertaken by FINRA under this agreement with
respect to common members of BATS Exchange and FINRA.\109\ Accordingly,
the Commission is conditioning the operation of BATS Exchange on
approval by the Commission of a 17d-2 agreement between BATS Exchange
and FINRA that allocates the above specified matters to FINRA.\110\
---------------------------------------------------------------------------
\109\ The Commission notes that regulation that is to be covered
by the 17d-2 agreement for common members will be carried out by
FINRA under the Regulatory Contract for BATS Exchange members that
are not also members of FINRA.
\110\ Alternatively, BATS Exchange could demonstrate that it has
the ability to fulfill its regulatory obligations.
---------------------------------------------------------------------------
5. Discipline and Oversight of Members
As noted above, a prerequisite for the Commission approval of an
exchange's application for registration, an exchange must be organized
and have the capacity to carry out the purposes of the Act.
Specifically, an exchange must be able to enforce compliance by its
members and persons associated with its members with federal securities
laws and the rules of the exchange.\111\ As noted above, pursuant to
the Regulatory Contract, FINRA will perform many of the initial
disciplinary processes on behalf of BATS Exchange.\112\ For example,
FINRA will investigate potential securities laws violations, issue
complaints, and conduct hearings pursuant to BATS Exchange rules.
Appeals from disciplinary decisions will be heard by the Appeals
Committee \113\ and the Appeals Committee's decision shall be final. In
addition, the Exchange Board may on its own initiative order review of
a disciplinary decision.\114\
---------------------------------------------------------------------------
\111\ See 15 U.S.C. 78f(b)(1).
\112\ See supra note 97 and accompanying text.
\113\ See BATS Exchange Rule 8.10(b).
\114\ See BATS Exchange Rule 8.10(c).
---------------------------------------------------------------------------
The BATS Amended and Restated By-Laws and BATS Exchange rules
provide that the Exchange has disciplinary jurisdiction over its
members so that it can enforce its members' compliance with its rules
and the federal securities laws.\115\ The Exchange's rules also permit
it to sanction members for violations of its rules and violations of
the federal securities laws by, among other things, expelling or
suspending members, limiting members' activities, functions, or
operations, fining or censuring members, or suspending or barring a
person from being associated with a member, or any other fitting
sanction.\116\ BATS Exchange's rules also provide for the imposition of
fines for certain minor rule violations in lieu of commencing
disciplinary proceedings.\117\ Accordingly, as a condition to the
operation of BATS Exchange, a Minor Rule Violation Plan (``MRVP'')
filed by BATS Exchange under Act Rule 19d-1(c)(2) must be declared
effective by the Commission.\118\
---------------------------------------------------------------------------
\115\ See generally BATS Exchange Amended and Restated By-Laws
Article X and BATS Exchange Rules Chapters II and VIII.
\116\ See BATS Exchange Rules 2.2 and 8.1(a).
\117\ See BATS Exchange Rule 8.15 and Amendment No. 2.
\118\ 17 CFR 240.19d-1(c)(2).
---------------------------------------------------------------------------
The Commission finds that the BATS Exchange's Amended and Restated
By-Laws and rules concerning its disciplinary and oversight programs
are consistent with the requirements of Sections 6(b)(6) and 6(b)(7)
\119\ of the Act in that they provide fair procedures for the
disciplining of members and persons associated with members. The
Commission further finds that the rules of BATS Exchange provide it
with the ability to comply, and with the authority to enforce
compliance by its members and persons associated with its members, with
the provisions of the Act, the rules and regulations thereunder, and
the rules of BATS Exchange.\120\
---------------------------------------------------------------------------
\119\ 15 U.S.C. 78f(b)(6) and (b)(7).
\120\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------
C. BATS Exchange Trading System
1. Trading Rules
BATS Exchange will operate a fully automated electronic order book.
Exchange members and entities that enter into sponsorship arrangements
with Exchange members will have access to the BATS Exchange system
(collectively, ``Users'').\121\ Users will be able to electronically
submit market and various types of limit orders to the Exchange from
remote locations. All orders submitted to BATS Exchange will be
displayed unless designated otherwise by the BATS Exchange member
submitting the order. Displayed orders will be displayed on an
anonymous basis at a specified price. Non-displayed orders will not be
displayed but will be ranked in the BATS Exchange system at a specified
price.\122\ The BATS Exchange system will continuously and
automatically match orders pursuant to price/time priority, except that
displayed orders will have priority over non-displayed orders at the
same price.\123\
---------------------------------------------------------------------------
\121\ To obtain authorized access to the BATS Exchange System,
each User must enter in to a User Agreement with the Exchange. See
BATS Exchange Rule 11.3(a).
\122\ BATS Exchange rules do not provide for specialists or
market makers.
\123\ See BATS Exchange Rule 11.8.
---------------------------------------------------------------------------
The BATS Exchange system is designed to comply with Rule 611 of
Regulation NMS \124\ by requiring that, for any execution to occur on
the Exchange during regular trading hours, the price must be equal to,
or better than, any ``protected quotation'' within the meaning of
Regulation NMS (``Protected Quotation''), unless an exception to Rule
611 of Regulation NMS applies.\125\ BATS Exchange will direct any
orders or portion of orders that cannot be executed in their entirety
to away markets for execution through BATS Trading, unless the terms of
the orders direct the Exchange not to route such orders away.\126\
---------------------------------------------------------------------------
\124\ 17 CFR 242.611.
\125\ See BATS Exchange Rule 11.9.
\126\ See BATS Exchange Rule 11.9(a)(2).
---------------------------------------------------------------------------
BATS Exchange intends to operate as an automated trading center in
compliance with Rule 600(b)(4) of Regulation NMS.\127\ BATS Exchange
will display automated quotations at all times except in the event that
a systems malfunction renders the system incapable of displaying
automated quotations.\128\ The Exchange has designed its rules relating
to orders, modifiers, and order execution to comply with the
requirements of Regulation NMS, including an immediate-or-cancel
functionality.\129\ These proposed rules include accepting orders
marked as intermarket sweep orders, which will allow orders so
designated to be automatically matched and executed without reference
to Protected Quotations at other trading centers,\130\ and routing
orders marked as intermarket sweep orders by a User to a specific
trading center for execution.\131\ In addition, BATS Exchange rules
address locked and crossed markets,\132\ as required by Rule 610(d) of
Regulation NMS.\133\ The Commission believes that BATS Exchange's rules
are consistent with the Act, in particular with the requirements of
Rule 610(d) and Rule 611 of Regulation NMS.
---------------------------------------------------------------------------
\127\ 17 CFR 242.600(b)(4).
\128\ See BATS Exchange Rule 11.9(c); see also 17 CFR
242.600(b)(3).
\129\ See BATS Exchange Rules 11.5 and 11.9; see also 17 CFR
242.600(b)(3).
\130\ See BATS Exchange Rule 11.5(d)(1).
\131\ See BATS Exchange Rule 11.5(d)(2).
\132\ See BATS Exchange Rule 11.16.
\133\ 17 CFR 242.610(d).
---------------------------------------------------------------------------
As stated above, BATS Exchange intends to operate as an automated
[[Page 49505]]
trading center and have its best bid and best offer be a Protected
Quotation.\134\ To meet their regulatory responsibilities under Rule
611(a) of Regulation NMS, market participants must have sufficient
notice of new Protected Quotations, as well as all necessary
information (such as final technical specifications).\135\ Therefore,
the Commission believes that it would be a reasonable policy and
procedure under Rule 611(a) for industry participants to begin treating
BATS Exchange's best bid and best offer as a Protected Quotation within
90 days after the date of this order, or such later date as BATS
Exchange begins operation as a national securities exchange.
---------------------------------------------------------------------------
\134\ 17 CFR 242.600(b)(58).
\135\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038, 30041 (May 24, 2006).
---------------------------------------------------------------------------
2. Section 11 of the Act
Section 11(a)(1) of the Act \136\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) \137\ under the Act, known as the ``effect versus execute''
rule, provides
